I think the BP and Royal Dutch Shell share prices can rally now. Here’s why

After a disastrous 2020, both the BP and Royal Dutch Shell share price can see sharp recovery in 2021 for a range of reasons. 

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FTSE 100 oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) had a 2020 that’s best forgotten. But they may well now be set up for high growth in 2021, if not beyond.

Both companies’ share prices regained some lost ground from 2020 as investor confidence returned late last year. In the past couple of weeks, however, both BP and Royal Dutch Shell saw a fall in their share prices. But I think that this is more likely to be the exception than the rule for the foreseeable future. Here’s why.

#1. Demand bounceback

With vaccinations under way, lockdowns on their way to being lifted and global travel poised to return later in the year, oil demand is making a comeback. According to the International Energy Agency (IEA), it’s now back to 95% of its pre-pandemic highs. This is a positive for both BP and Royal Dutch Shell.

#2. Oil price increase

With demand returning, oil prices have rebounded in 2021. According to the International Monetary Fund (IMF), on average, oil prices this year will be 21% higher than those last year. 

Besides demand increases, short-term supply disruptions can also increase oil prices, like the recent Suez Canal blockage. However, this supply disruption is likely to be a short-term phenomenon that doesn’t have a long-term impact after a brief spike in the oil price. As a side note, other supply shocks may not be that benign however, so supply blocks do not always work in favour of oil companies.

But for now, both BP and Shell are in a place to make gains, price-wise.

#3. BP and Royal Dutch Shell pay dividends

With an increasing number of FTSE 100 companies reinstating dividends now that the outlook has improved, I reckon investors will once again be considering the best investments to generate a passive income. 

Historically, both BP and Royal Dutch Shell have been dependable dividend-payers. I do not think that is about to change, even considering last year’s dividend cuts. BP’s dividend yield is already at a healthy 5% and Royal Dutch Shell is at 3.5%.  

#4. Going green

While higher demand and oil prices, as well as dividend payouts, bode well for the near future, the long-term future of big oil is in question. To that extent, I like the recent forays of both into green energy. 

BP, for instance, is building the UK’s biggest hydrogen power plant. Shell is exploring opportunities in Australia to develop its hydrogen business too. 

Risks to both

Of course, there’s no guarantee that the oil companies will be able to make a success of the green transition. Further, even in the short term, there are risks to the pace of recovery. We’ve seen reports of a rise in coronavirus cases again and in some countries, the vaccination process is going slower than anticipated.

The takeaway

On balance though, I think both the BP share price and the Royal Dutch Shell share price can increase in the foreseeable future, especially since they’re still way below their pre-pandemic levels. But the longer term is a wait-and-watch, I feel. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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