Shares in Royal Dutch Shell (LSE: RDSB) recently rose to one-month highs as the oil price fightback continued.
Confidence in crude values received a shot in the arm following comments from President Trump last week. He suggested then that a deal between Saudi Arabia and Russia to curb production again was around the corner. The Brent benchmark climbed back above $30 per barrel as hopes grew.
Deal in dire straits
It didn’t take long for the rally to run out of steam, however, and energy values were sliding again on Monday. Why? The OPEC+ meeting scheduled for today was booted back to Thursday, 9 April, as lawmakers in Riyadh and Moscow blamed each other for the failure to seal a new production agreement last month.
It’s possible that a deal could still be forthcoming, of course. The political and economic considerations mean that you probably shouldn’t bet the mortgage on one emerging, however. As the boffins over at ING note:
“It is going to be difficult for producers to agree on cuts, particularly in the region of 10 to 15 million metric barrels a day. Anything less than this would likely disappoint the market.” The bank’s analysts added that the US would probably have to pledge to cut its own output to bring the Russians on board. And this is a scenario that’s described as being “a tough ask.”
Brent to hit single digits?
Some are arguing, too, that the outlook for oil prices is quite grim irrespective of whether a new OPEC+ accord is hammered out.
According to a note from Fitch Solutions, Brent prices could slump to single-digit lows. Aside from the threat of oversupply, the market also faces sinking demand owing to the coronavirus pandemic. The ratings agency predicts that a surplus of 20m barrels a day could emerge that would “overwhelm global logistics chains.”
Share investors should be prepared for a possible fall in oil values and the prices of associated stocks like Shell, then. Lower energy prices today means a knock-on effect for ‘Big Oil’ investment and thus production further down the line. And this means giving shares like Shell a wide berth in spite of their mighty dividend yields.
Shell smashed
In recent days, Royal Dutch Shell has also revised down its oil price forecasts for 2020. As a consequence, it said that it expects post-tax impairment charges of a whopping $400m to $800m for the first quarter. It’s clearly possible that more meaty writedowns could be laying in wait for the current three-month period.
The near-term earnings outlook for Shell is quite muddy, then. It’s quite worrying over a longer time horizon, too, given the massive investment that non-OPEC nations have made in their oil industries in recent years. I don’t care about its 10.7% dividend yield for 2020, then. I’d rather load up on other FTSE 100 dividend stocks.