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Royal Dutch Shell plc’s Share Price Is Falling Like A Stone. Should You Buy In?

  1. Momentum can be a frightening thing.

Shell (LSE: RDSB) is a stalwart of many investment and pension funds, in the UK and around the world. And it’s just as popular with small investors. So any movement in its share price can have a dramatic effect.

Oil demand is falling, and supply is rising

And current investors must be looking on aghast as this oil titan’s share price has been falling. And falling. And falling. In May 2014 the share price peaked at 2576p. Today it stands at 1613p. And the worrying thing is that these falls show no signs of abating.

Why is this happening? Well, take a chart of the oil price over the past year and the picture is the same: the value of this commodity has been sliding remorselessly downwards. In June 2014 Brent crude was valued at $111 per barrel. It has now tumbled to $48 a barrel.

Increasing numbers of fuel-efficient, hybrid and electric vehicles, and declining heating oil use, has meant that demand for the black stuff is levelling off. Meanwhile, a modern-day oil rush has meant more wells have been drilled, often in the furthest reaches of the Earth, shale production is ramping up, and the Gulf states are producing more petroleum than they have ever done before. The world is drowning in oil.

And the gas price has fallen even further

But, I hear you say, half of Shell’s energy production is now in natural gas, much of which it stores as LNG (liquefied natural gas). Could this act as a buffer to protect against the falling oil price?

Well, if we check the charts, we find that the price of natural gas has also been on a downward trend. In June 2008, the cost of gas was $12.68/mmbtu. In February 2014 it was $5.98/mmbtu. It is now down to $2.76/mmbtu.

Have I painted too stark a picture? Well, globally, over the long term, a wealthier and more populous planet means greater demand for energy. However this demand is spread over a range of sources, from oil, coal and gas to the booming nuclear, solar and wind sectors. This complexity means that it is difficult to be conclusive, but my overall view is that the oil and gas price will be low, but not that low.

Take a look at the fundamentals, and they seem very positive. The 2015 P/E ratio is 11.97, falling to 10.34 in 2016. And the dividend yield is a tempting 7.48%. Make no mistake, I think Shell is a much better buy than its peer BP, which is still being dragged down by the legacy of Deepwater Horizon.

But I think that profits are set to fall, the dividend is likely to be cut, and the P/E estimates are over-optimistic.

The low share price may make this company seem an appealing buy, but I would resist the temptation. I think this is a value trap. Long-term investors should steer clear.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.