The oil industry has been one of the hardest hit by the pandemic, and Royal Dutch Shell (LSE:RDSB) shares are no exception. Global lockdowns have meant cars, aircraft, and cruise ships remained parked and unused. This lack of activity resulted in an immediate decline in the demand for oil-based fuels, and thus oil prices have plummeted.
Due to a new strain of Covid-19, a Tier 4 Christmas lockdown has gone into effect across parts of the UK, with tighter restrictions (if not lockdowns) in others. But what does this mean for the shares of Shell and the oil industry in general?
The Christmas lockdown and oil prices
Over the past 20 years, the price per barrel of oil has been steadily declining. Innovations in green energy have made technologies such as wind and solar farms far cheaper, and therefore more viable as an alternative. In my opinion, this has been the primary driver for the historical decline in oil value.
But this year has meant extra pressures. In March, much of the world came to a standstill. Global lockdowns resulted in fuel consumption plummeting almost overnight. As such oil, prices dropped to average lows of $11.26 per barrel – an 82% decline compared to the previous year.
As lockdowns were lifted, the demand for fuel returned, and the oil price began to recover. This recovery accelerated on the announcement of several Covid-19 vaccines. But will a Christmas lockdown change all that?
Probably not. While it has caused an adverse effect, with oil prices dropping by $2 a barrel, the lockdown is restricted to parts of the UK, with most of the world remaining open. But it certainly adds more volatility to the path of recovery.
Implications for Royal Dutch Shell shares
Royal Dutch Shell is an oil & natural gas explorer, producer, and refiner. Therefore the price of crude oil is the primary driving force behind the profits of the business. Needless to say, 2020 has been a tough year.
Even before the Christmas lockdown was announced, its oil refineries were still not up to maximum capacity, operating at around 72%-76% of that level. Based on its most recent quarterly results, revenue has dropped by nearly 50% compared to a year ago, and profits by 89% thanks to a weakened oil price.
What’s more, the firm announced its intention to write down the value of its oil & gas assets by $3.5bn to $4.5bn. This can be interpreted as management no longer believing oil prices will return to its historical highs.
Can Shell shares recover?
I think the likelihood of Shell shares returning to £27 is low. Over the short term, oil prices may return to pre-Covid levels. However, with a continual shift towards green energy supported by most western governments, the glory days of the oil industry may be over.
The UK, along with the rest of Europe, is aiming to be carbon-neutral by 2050. Furthermore, based on Boris Johnson’s ‘Green Industrial Revolution’, petrol and diesel cars are being phased out by 2030. Combined, these two factors likely mean the complete removal of oil-based fuels for both the energy and automotive sectors. Both of which are the primary drivers behind oil prices today.
Personally, I’d much rather invest in renewable energy stocks, such as Greencoat UK Wind.