What do surging oil prices mean for the Shell share price?

| April 29, 2022

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oil rig on the ocean delivering extracted materials onto boat

Key Points

  • The Shell share price has followed oil prices in surging.
  • Shell changes its name and moves Headquarters to the UK
  • Shell operates nearly 90,000 EV charging points and aims to increase it to 500,000 by 2025.

The Shell (LSE:SHEL) share price is up 28% year to date and almost 50% over the last 12 months. That’s hardly surprising. Why? Because both WTI Oil and Brent crude oil have reached new highs this year. As oil prices surged, it dragged along companies in the oil and gas sector, including Shell.

The shortage in oil supply triggered by the Russia-Ukraine war has continued to make oil prices unpredictable. But what does that mean for the Shell share price moving forward?

Shell’s transition: Beyond oil and gas

Shell, formerly Royal Dutch Shell, is at the start of a business transformation. Beyond changing its name, management moved headquarters from the Netherlands to London. This is amidst the company’s plan to become more than an oil and gas company. With the Paris Agreement and the net-zero agenda by 2050, the firm plans to be more competitive with the new structures. 

Management has set the goal of Powering Progress. This is its new strategy to accelerate the transition to net-zero emissions purposefully and profitably. The group intends to meet the world’s growing energy needs through cleaner energy solutions in economically, environmentally, and socially responsible ways.

In 2021, the company made real efforts toward meeting its new strategy. For instance, at the end of 2021, Shell operates nearly 90,000 electric vehicle charge points. And it aims to increase that number to over 500,000 by 2025. Meanwhile, its investments into green and renewable energy sources continue to ramp up, with the ultimate goal of minimising carbon emissions while still powering cars, trucks, homes, and even cargo ships.

What does this mean for the Shell share price?

The Shell share price has soared recently even as the rest of the stock market tumbles. I’ve already said the catalyst behind this growth is the rising oil prices. But can this surging performance continue?

Personally, I’m not so sure. I doubt the short-term demand for oil & gas is going to diminish anytime soon. But eventually, the supply will catch up, even if the tragic Easter European conflict continues for a prolonged period of time.

By being overly reliant on this commodity, the bottom line is ultimately at the mercy of fluctuating oil prices. Currently, this cyclicality is working in the group’s favour. But as I just said, that can and inevitably will come to an end. And it seems Shell’s management would agree, given it’s trying to move away from the commodity at an accelerated pace.

What about the long term? The business is positioning itself to become a big player in the net-zero economy. It’s already started building new supply chains in electricity, hydrogen, and biofuels. While there remains a long road ahead, I think the Shell share price could have a bright future ahead if it succeeds in capturing its desired market share.

But going green also has its risks. Today, profit margins on renewable energy technology are far tighter than oil & gas. So, even if the group does succeed, growth in profits could slow considerably.

Final thoughts on the Shell share price

While Shell’s share price has surged this year, no one can say whether it will be able to sustain it. If oil prices continue to climb, the stock will likely do the same, in my opinion. But its ability to maintain this growth over the long-term seems entirely dependent on management’s ability to implement its new energy transition strategy.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.