Royal Dutch Shell share price forecast: is it time to buy?
10:41, 4 August 2020
Shell stock is down 47% since January, and there's no clear sign of recovery yet. However, as more countries reopen for business and air travel resumes, the oil market could bounce back in the second half of 2020. Does this mean that now is a good moment to invest in RDSB? Read our Royal Dutch Shell stock analysis to find out.
Covid-19, oil prices, and RSDB: the mostly sad tale of the past six months
The oil industry has become one of the main victims of the Covid-19 pandemic. With a decline in global travel and transportation, manufacturing shutdowns, the demand for oil, diesel and other oil-based products collapsed. By March, global consumption was 1.1 million barrels per day lower than in 2019. The situation was exacerbated by the oil price war between Russia and Saudi Arabia.
RSBD share price reacted accordingly, falling 46% between March 1 and March 18, 2020 and finally hitting bottom out at 9.1p. Nevertheless, in the following 2 weeks RSDB surged by over 60% to reach 14.75p.
On April 9, 2020 Saudi Arabia and Russia agreed to cut production, but it didn't help the oil price much. April 20, 2020 marked a historical event: the price of WTI oil futures fell below zero for the first time: the demand was so low that oil facilities were near their maximum storage capacity. Meanwhile, Brent Crude – the key market for Shell – fell to $19.3, its lowest point for over 17 years.
After that, the situation in the oil market began to improve, albeit cautiously. On May 1, 2020 the OPEC+ production cuts agreed in April finally kicked in, with 9.7 million barrels less pumped per day. This was followed by a price rally from $26 to $43 for a barrel of Brent Crude: +65% in just seven weeks.
It could have grown even more if China hadn't announced that in 2020 it wouldn't publish a growth target for the first time, and if the US-China relations hadn't worsened.
Unfortunately, RDSB didn't follow oil’s example: the stock grew just from 12p to 12.9p between May 1 and June 21, 2020. A short-lived rally on June 9, 2020 didn’t result in sustained gains.
Between June 22 and July 22, 2020 oil prices edged upward $43.08 to $43.7 for a barrel of Brent. In the same period, RDSB price decreased by 9% from 13.1p to 11.9p. In particular, the stock took a 3.7% hit on June 30, when Shell announced that its Q2 financial results would include an impairment charge of up to $22bn due to reduced oil and gas price forecasts. Another factor was the news that US oil inventories are now 19% above the 5-year average.
Speaking of the impairment write-off, we should point out that it's not a loss of cash. It's a normal valuation adjustment that will become a reality if today's abnormally low oil prices persist for years to come. If, however, the oil market recovers, the write-off can be reversed.
Now that we've brought the story up to the present moment, let's proceed to Royal Dutch Shell stock analysis and forecast for the rest of 2020, 2021, and further.
What is your sentiment on BP?
Royal Dutch Shell share price forecast: short term
The International Energy Agency (IEA) predicts that the demand for oil in 2020 will be at the 2012 levels. It can take more than a year for it to bounce back to pre-pandemic values. If a second wave of infections does happen in autumn, as many worry it will, the recovery will be even longer. In fact, Shell CFO Jessica Uhl recently said that “we don't even know [if the demand for oil] will come back”.
Under these conditions, the price of Shell shares will likely stay under 14p in 2020. However, it's unlikely to fall further, either. On the one hand, Shell has a robust balance sheet and enough resources to weather the storm. Cutting the dividend gave the company an additional $10bn. Plus, Shell owns large-scale refineries, which actually profit from low oil prices: their margins become higher.
Moreover, according to the IEA, by December the demand should be just 2.7 million barrels lower than in 2019 – as opposed to the year-on-year slump of 14.6m barrels in June. This will help RDSB bounce back. In fact, the consensus Shell share price forecast offered by analysts features a median 12-month target of 16.67p, or 40% higher than in July 2020.
RDSB outlook: long term
In the next 5 years, we can expect the following cycle to unfold:
- While demand is low, oil giants – including Shell – cut down on investments in new drilling sites to minimize costs;
- As demand slowly bounces back, the pre-Covid oversupply is eliminated;
- Finally, a deficit of oil arises – as much as 5 million bpd, according to Rystad Energy;
- As demand finally starts to exceed supply, oil prices rise, possibly to $65-70 by 2025;
- The price of RSDB and other oil shares increase accordingly.
Overall analysis of Royal Dutch Shell shares: buy or sell RDSB?
In Q1, Shell cut its dividend from $0.94 to $0.32. It was the first such cut in more than 70 years: clearly, the oil major really needs the liquidity right now. While no such cut is expected for Q2, Shell is hardly a reliable stock for income investors right now. However, if you are in it for dividends and you already own RDSB, it's better to hold on to them rather than sell.
As for growth investors, everything depends on your time horizon. If you are only prepared to hold a stock for 6 months, then there are much better opportunities on the market right now than Shell. If you don't mind holding it for 12 months, though, you can expect to earn up to 40%.
Finally, if you are ready to wait till 2023 or even 2025 to sell your stock, RDSB could be a very good buy indeed. In fact, if the price just recovers to its July-2019 level of 25p, you will have gained 110%. This is totally possible: after all, the world will depend on oil for the foreseeable future, and Shell will remain one of its key suppliers. Follow Capital.com for more Shell share price news!