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How Far Will BP plc And Royal Dutch Shell plc Fall If The Oil Price Reaches $20 A Barrel?

Isn’t it interesting how, whenever there’s any news, we tend to jump on the negative side rather than the positive? As a commuter, I drive many thousands of miles every year. That’s why it’s great for me that the oil price is falling. And alongside the hundreds of pounds I’m saving on my daily commute, I’ll save a pretty penny on my heating bills over the next few years. Cheap fuel allows the global economy to run more cheaply, and that benefits consumers around the world.

The oil price could soon reach $20 a barrel

That’s why personally, I’d be absolutely delighted if crude fell to $20 a barrel. And with the oil price falls seeming to gather momentum, instead of slowing, there’s a strong likelihood that it could reach that level some time fairly soon.

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I’ve already written about why this is taking place. Booming exploration and production, from the Gulf to the Arctic, and shale oil mean that the market is flooded with cheap petroleum. And with nobody taking the first step in cutting back production, the oil price just keeps falling.

I sold out of my oil, gas and minerals investments years ago, as it became apparent that the commodities boom that was fuelled by a resurgent China was ending. Some people might suggest that it’s a contrarian play to buy back into oil companies. I would choose to disagree.

Just how far could the share price of BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) fall if oil fell to $20 a barrel? Well, let’s look back to what happened in the last commodities bear market. This was in the 1990s. Back in 1992, the oil price traded between $18-$20 a barrel.

The share prices of these giants could halve

Now the highest point the BP share price reached was 676p in 2006. It currently stands at 352p. How low did it fall in 1992? To 93p. Let me say that again… 93p!!!

That was the low point, but generally in the 1990s BP traded at around 150p.

It was a similar story for Shell, which also plumbed the depths in the 1990s. Admittedly, the picture is clouded by the fact that BP merged with Amoco and Arco in the late 1990s. But I think the big picture is clear: you can expect the valuations of the oil majors to drift lower for at least the next decade.

Just how low will they fall? Well, my guess is 150p for BP and 600p for Royal Dutch Shell (as opposed to 1388p now). That means that, over the course of the next 10-15 years, these energy giants will more than halve in price.

If that prospect doesn’t frighten you as an investor, it certainly should. My investment advice for both companies is unequivocal. STEER. WELL. CLEAR.

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

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