Shell (LSE:SHEL) shares are up 40% over the past 12 months. That’s pretty phenomenal for a company of its size. With a market-cap of £165bn, it is currently the largest firm listed on the FTSE 100 — marginally ahead of pharma giant AstraZeneca.
But let’s take a closer look at what’s been moving the Shell share price, and explore whether I’m too late to buy stock in this oil giant.
Five-year trend
If I had invested £500 in Shell shares five years ago, today I’d have about £502, plus dividends. It’s not that the share price has stayed still. It’s quite the opposite. The share price plummeted in 2020 when the pandemic hit and oil even went negative for a brief period when traders couldn’t find buyers for hydrocarbons products.
In fact, over the last two years, which takes us back to September 2020, the Shell share price is up a huge 148%. It’s clear that the company’s fortunes have really turned around over the past 24 months. However, it is worth remembering that peaks and troughs are expected in cyclical industries as demand waxes and wanes.
A bumper year, but its outlook is souring
Shell shares have soared this year on the back of rising oil prices. In fact, margins have been pretty good in the downstream and retail parts of the business too. And it’s not just oil, Shell, like other hydrocarbons companies, extracts and sell natural gas. As we all know, the spot price of natural gas has gone through the roof this year.
But, like other investors, I am trying to work out what the operating environment will look like in six-12 months, as well as further into the future. And there is some uncertainty here.
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. In fact, since that forecast, we’ve already seen OPEC+ reduce oil production once, and the nations could commit to much larger cuts in October and November.
Will it be enough to keep oil prices where they are? It’s hard to tell. But it is clear amid weakening economic forecasts in Europe, China and elsewhere in the developing world, that there is downward pressure on oil prices.
Too late to buy, or too early?
Shell operates in a cyclical industry, so I knew this bumper year wouldn’t last forever. Personally, I think I’ve missed this year’s bull run so I won’t be buying now. In fact, I expect to see the share price fall towards the end of the year as oil demand weakens.
However, I’m pretty bullish on the long run, so I’d consider buying at a better entry point later in the year. There are two reason for this.
Firstly, two major demand shocks in the last seven years have made oil producers a lot leaner. And that means breakeven points have come down — all in all, I find them more attractive businesses today than they were a decade ago.
Secondly, I contend that we’re entering a period of scarcity and enhanced competition over the long run, and this will push prices up. Companies like Shell will benefit.