Royal Dutch Shell (LSE: RDSB) shares crashed spectacularly yesterday, falling around 18%. That’s a significant fall for a well-established, blue-chip FTSE 100 company. Here, I’ll look at why Shell shares crashed and explain whether I believe the recent share price weakness has created a buying opportunity.
Oil price war
The main reason for such a dramatic collapse yesterday is that oil prices have plummeted in the last few days. That came after Saudi Arabia launched a price war against Russia.
According to reports, Russia refused to agree with the Organisation of the Petroleum Exporting Countries’ (OPEC) proposal to bolster the coronavirus-hit oil market by further cutting production. Consequently, Saudi Arabia slashed its selling prices in an effort to recapture market share and put pressure on Russia.
The end result of this price war is that Brent crude, the global oil benchmark, has fallen to around $36 per barrel, down from nearly $60 in mid-February.
Bad news for Shell
Naturally, lower oil prices are bad news for companies like Shell as they translate to lower revenues and profits. The sharp drop in the oil price over the last few days is certainly a concern for Shell.
Yet with the stock down 18% yesterday (and down more than 30% in less than a month), the question is – has the recent share price weakness created a buying opportunity for investors who are willing to think long term?
Personally, I believe the recent oil price-related share price fall has created an attractive buying opportunity. The reason I say this is that history shows buying Shell shares during periods of extreme oil price weakness can be a profitable move.
For example, in early 2016, the price of Brent crude fell below $30 per barrel on the back of a supply glut. At the time, RDSB shares fell to near 1,250p. However, as the oil price recovered over the next year, Shell shares rebounded significantly. Those who bought the stock when it was out of favour were rewarded handsomely.
Similarly, when the oil price crashed during the Global Financial Crisis in 2008, RDSB shares fell to near the 1,250p level. Yet by 2011, the shares were trading at a much higher level on the back of higher oil prices.
Importantly, Shell maintained its dividend on both occasions, despite the fact that profits took a hit. Investors didn’t only benefit from the recovery in the share price. They also picked up a generous stream of dividends while they were waiting for the rebound.
Of course, it’s important to realise there’s no guarantee oil prices will rebound in the near future. Given the economic uncertainty associated with the coronavirus, it’s impossible to know how oil will perform in the short term.
However, for those with a long-term investment horizon, I think Shell shares offer an attractive risk/reward proposition at present. My view is that oil prices should eventually recover. And with a prospective dividend yield of around 11% on offer from Shell at the moment, those buying now should be paid a generous income stream to wait for the recovery.