Shell (LSE:SHEL) shares are currently trading for over £20, giving it a market cap of around £150bn. It is a truly huge oil company that has gained considerably over the past year.
The main reason for the soaring share price is the strength of oil. With the global economy recovering over the past year, demand has increased and supply hasn’t been able to keep up. Russia’s invasion of Ukraine has added a further level of complexity.
So, let’s take a close look at Shell’s fortunes.
A bumper year
If I had invested £1,000 in Shell shares a year ago, today I’d have £1,454, plus whatever dividends I had accrued over the year — around £50.
So, clearly it would have been a good investment. In fact, I did buy Shell shares around a year ago but sold earlier in 2022, thinking they surely couldn’t go any higher. How wrong I was.
Shell’s share price has broadly followed fluctuations in the oil price over the past year. The commodity had been gaining with benchmarks extending above $120 a barrel. However, there has been some weakness over the past two months, amid concern for the global economy and Chinese demand due to continuous Covid lockdowns.
Outlook for oil
The profitability of Shell, and other oil companies, depends on the price of oil and gas, which in turn impacts the margins that it can achieve.
And predicting where oil will go next is increasingly challenging.
Oil has dipped in recent weeks, with Brent trading below $100 last Thursday. But news that US President Joe Biden hadn’t secured a production increase from the Saudis over the weekend sent oil soaring on Monday.
And there are other factors at play. The global economy is expected to weaken this year and that could bring crude prices down as low as $45 next year according to Citi analysts. Equally, there are concerns Russia could cut production and sales to Western allies in order to punish them for backing Ukraine. In this scenario, some analysts suggest prices could reach nearly $400 a barrel.
My take
I’m actually bullish on oil and most commodities in the long run. I see us entering a period of scarcity and enhanced competition, and this will push prices up. So that’s good for companies like Shell.
Shell also has downstream operations that are very profitable right now. Not only is the barrel price good, but it’s selling fuel in the UK for around £1.90 a litre.
But we also need to remember that Shell is a business in transition. Like many of its peers, Shell is slowly pivoting away from fossil fuels towards green energy. That’s obviously great for the environment, but possibly risky given the success of integrated oil companies over the past century. Although, it’s worth noting that the green energy business should be less cyclical.
So, while my long-term view is broadly positive, I think there will be a better entry point for me to buy this year. I’m largely expecting oil prices to fall as the global economy weakens. So, I’ll be keeping an eye on the Shell share price, but won’t be buying now.