The Shell (LSE: RDSB) share price has been one of the best performing investments in the FTSE 100 over the past year. In that period, the stock has returned 37%, including dividends, while the FTSE 100 has added just 16.6%.
Unfortunately, even after this performance, the stock is still trading below its pre-pandemic level of around 2,300p. But I think that could be about to change.
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Rising demand and geopolitical tensions have pushed the oil price to a seven-year high this week. For oil producers like Shell, this is fantastic news. After two years of disruption and a period of negative oil prices, it now looks as if the industry is well on the way to recovery.
And it is not just oil prices that are surging in value. Natural gas and other hydrocarbon products are in high demand. These are significant tailwinds for the company and its peers.
However, I should note that this Goldilocks environment is unlikely to last forever. The commodity industry is highly volatile. Prices can rise and fall dramatically over the period of a few months.
High commodity prices tend to stimulate output growth, which can lead to oversupply and, as a result, lower prices. Volatility will always be the biggest challenge any commodity company has to deal with.
Still, Shell’s outlook right now is the brightest it has been for many years. According to City analysts, the company is on track to report earnings per share of around 178p for 2021, increasing around 20% from 2019 levels. Further growth of 33% is expected in 2022.
Shell share price opportunity
I think this earnings growth alone can justify a higher Shell share price, but the firm could also attract investors for its cash returns and investment plans.
Shell’s management is committed to returning cash to investors. Indeed, at the end of last year, the group reorganised its corporate structure as part of its attempts to return more money to investors. This unified structure will allow the company to accelerate its share buyback policy.
On top of this, the enterprise is planning to invest significant sums over the next decade in renewable energy technologies. With profits at the hydrocarbon business rising, Shell will have more capital to play with, suggesting the corporation can increase shareholder returns, keep debt at a manageable level, and increase spending on renewable technologies.
On this last point, while the company made its name in the oil and gas business, the enterprise must prepare for the future. This means investing in renewable and clean energy technologies.
With profits rising, the group should be able to increase spending and accelerate its drive into clean energy. This could help improve investor sentiment towards the enterprise and underpin future earnings potential.
All in all, I am excited about the potential for the Shell share price over the next few years. That is why I would buy the stock for my portfolio today.