As with almost all oil companies, if you want to know what will happen to the Royal Dutch Shell (LSE: RDSB) share price, you need to ask what will happen to crude oil. The negative prices of WTI crude – the US benchmark – have of course been making headlines. Being paid to buy someone’s oil seems ludicrous after all.
Despite the fears, panic, and headlines, however, I think this kind of situation offers an opportunity.
The price of oil
As with all free markets, the interaction of supply and demand determines – in theory – the price of crude oil. The problem is that, much like the stock market, perceived or expected supply and demand have as much impact as actual supply and demand.
Unlike the stock market, crude oil a physical product, that needs to be stored in the real world. If you have read up on crude recently, you will know that the negative price is partly a result of concerns there is not enough storage capacity. This is in addition to oversupply and lack of demand caused by coronavirus.
One aspect that gets less of a mention however, is the influence of paper trading. This is the buying and selling of crude futures contracts with no intention of buying or supplying oil itself. This often determines commodity prices in the short term. This trading is almost entirely based on expectations, and is far more volatile than the fundamentals of crude.
The Shell share price
I say all this because it is worth keeping in mind when assessing the Shell share price. There are some fundamental weaknesses in oil right now, but these will eventually even out at far higher levels than the current price. Shell’s share price will gain accordingly.
To answer the title question, assuming no other major shocks to the oil price, I suspect the stock may indeed have reached a bottom. Having dipped below £10 per share in March, the shares have already bounced back to almost £14.
I do however urge caution. The market is far from secure at the moment, and panic selling in both crude and shares is far more likely than in safer times. Unfortunately it wouldn’t take much, I think, to send oil stocks lower once again. For those willing to invest at such times, however, this may be a dip buying opportunity.
Royal Dutch Shell is a fundamentally sound company. It has consistently paid out decent dividends, through both good years and bad. It has also shown a healthy attitude towards both diversification and green energy. No doubt its revenue and profit figures for this year will take a hit. But for those willing to invest for a year or two, I think the risks are probably quite low.
The Shell share prices started this year at about £23. When crude prices begin to recover, we would hope that at least some of this level would be regained. For those willing to take the risk, I think now could be the perfect time to buy Shell shares.
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Karl has shares in Royal Dutch Shell. 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.