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When the oil price climbs, shares in Shell (LSE: SHEL) tend to follow. The same applies to gas prices. With both fuel types surging as a result of the Iran war, the FTSE 100 energy giant looks positioned for a double lift.
Shell isn’t a pure play on commodity prices. Its refining, trading, and other operations soften the link. But when missiles and drones began flying across the Middle East, its shares were only going one way. Can they continue?
Today it’s pulled back slightly after markets took Donald Trump at his word when he said the conflict was “pretty much” won. But there are too many moving parts for anyone to predict the next step with confidence.
FTSE 100 oil shock winner
When Russia invaded Ukraine in 2022, crude surged to $116 a barrel. Energy stocks rallied sharply, including Shell and FTSE 100 rival BP. There was talk of crude hitting $150 or even $200. It didn’t happen. Europe sourced its energy elsewhere and prices cooled. Even so, long-term oil investors have done well. The Shell share price is up 107% over five years, with dividends on top.
It has climbed 25% in the last year, although much of that came in recent weeks. At today’s price of 3,193p, the shares are up 12.8% over the last month. That means £10,000 invested four weeks ago would now be worth about £11,280.
Where Shell goes next is unknowable. Everything hinges on events in the Gulf. If the critical Strait of Hormuz supply line remains closed, prices could rocket. Analysts at Société Générale estimate the conflict has already knocked out 17m barrels a day. That’s roughly a sixth of global consumption. Liquefied natural gas markets look even tighter.
Repairing damaged infrastructure isn’t an overnight job. Pressure and flow lines suffer permanent damage if production stops for a month.
Long-term investment case
On the other hand, a sudden victory or diplomatic breakthrough might sink the oil price and Shell shares. It could happen. Since the war started, Brent crude has shot up from $71 to $107, and is now back down to $87 today. I’m not a gambler, and I wouldn’t place a bet on where the price goes next. But I would consider buying Shell.
The difference is that I buy stocks with a long-term view. I think that over five or 10 years, Shell will deliver an attractive total from share price growth and reinvested dividends.
Despite climate concerns, the global economy still runs on oil and gas. Recent events underline that. Shell remains one of the world’s largest producers and its valuation doesn’t look stretched.
The stock currently trades on a price-to-earnings ratio of about 13.7. Its trailing dividend yield sits around 3.35%. Both numbers are decent, although not stellar.
Long-term performance isn’t guaranteed of course. Renewable energy could expand faster than expected and erode demand for fossil fuels. Today’s conflict might accelerate the transition away from hydrocarbons. Even so, investors with a long horizon might consider buying Shell. And in today’s volatile market, I can see plenty of other attractively priced FTSE 100 stocks to consider buying too.
