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I’m avoiding FTSE 100 stock Shell and its 10% dividend yield, as $10 oil is predicted

A shaky start to US trading caused the FTSE 100 to give back much of its gains in Wednesday trade. It’s since stabilised and was last up 1% on the day as market confidence recovered again.

It’s likely, too, that further falls in the pound have boosted the Footsie in afternoon trade. Sterling weakness provides companies that report in foreign currencies with a profits tailwind. This is the case for a large number of companies quoted on Britain’s blue-chip index.

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One of these shares is Royal Dutch Shell (LSE: RDSB). In fact, the oilie’s been one of the FTSE 100’s best performers in recent sessions, up almost 50% in the space of a week. It’s currently 4% higher on the day in midweek trade, too.

Demand destruction

At the risk of sounding like a sourpuss, though, I for one won’t be joining in on the frantic buying of Shell’s shares. It’s hard to justify such heady share price gains when the colossal supply and demand dangers it faces have changed little since last Wednesday.

Sure, the US government’s fresh $2trn stimulus package agreed last night could well support energy demand. However, there are more significant oil price drivers at play right now, ones that threaten to drive crude prices southwards.

A report from Rystad Energy illustrates just what I’m talking about. The respected energy research body now expects global oil demand to tank 4.9% in 2020 to 95m barrels per day. It comments that “this downgrade takes into account developments that happened within the course of last week such as the new quarantine lockdowns across the world.”

This is unlikely to be the end of the matter, though. These extra social distancing measures prompted Rystad to cut its daily demand forecasts by 4.9m barrels per day, much worse than the 2.8m barrels estimate put out just a week ago. Readers should expect more downgrades, then, given that self-isolation measures are tipped to rise in major economies like the US in the days and weeks ahead.

$10 oil?

The most worrying takeaway from Rystad’s latest study, however, is the firm’s prediction for the oil price of $10 per barrel.

It’s not just the worsening coronavirus crisis and its impact on demand that could force energy values to these levels, it says. The collapse of OPEC+ harmony last week, and the subsequent flood of oil from Saudi Arabian wells, also threatens to cause a mighty, price-crushing surplus. Indeed, Rystad estimates that 1bn barrels worth of inventory builds could be coming by the summer. It’s a terrifying figure – that’s more than all remaining stock capacity on the planet.

You can forgive me, then, for not caring about Shell’s historically low forward price-to-earnings ratio of 12.3 times. I’m also happy to give its 10.7% dividend yield short shrift. This is a share that, despite its mighty share price gains of recent days, is still loaded with colossal short-to-medium-term risk. I’d rather put my investment cash to work elsewhere.

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Royston Wild has no position in any of the shares mentioned. 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.