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Shell share price: buy for a green energy transition?

Royal Dutch Shell shares (LON:RDSB) suffered a turbulent 2020 with COVID-19 ravaging the global oil market leading to the phenomenon of negative oil prices and sharp downside in oil companies shares.

The severe volatility led to Shell cutting their dividend, a move that was seen as unthinkable in late 2019 before the global pandemic.

Royal Dutch Shell Share Price

The Shell share price trades at 1,300p and is down 34% over the past 52-week period. However, the current share price does represent a major improvement on the lows around 860p touched in October 2020.

Shell shares staged a significant rally inline with global equity market on the news of successful vaccine trials that breathed hope back into risk assets, including the Shell shares and the price of oil.

With shares now trading just below the highest level since the start of the pandemic, investors will undoubtedly be questioning the outlook for Shell with most of the positive news around an economic reopening largely priced in.

Oil Price

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The price of oil will undoubtedly be in the biggest influencer of the Royal Dutch Shell share price in the immediate future.
If oil prices rally sharply the additional liquidity flowing into Shell’s coffers will speed up the progression of their dividend and bring back an army of income investors.

Conversely, if oil prices begin to slip, Shells profitability will once again be put under pressure, leading investors to likely shun the shares.

Indeed, any negativity in the price of oil could be particularly bad for Shell because oil is hovering around $50, unable to fully recover to prices seem at the beginning of 2020. Yet this concern will likely be seen as secondary to the fact that oil consumption is oil is thought to have already peaked by Shell’s competitor BP.

BP has run a number of models on the consumption of oil with one such forecast showing oil demand peaking in 2019. If this plays out in the real world, it would mean we have already passed ‘peak oil’ and oil demand will never surpass the level of demand.

This will have a far greater impact on the Shell share price over the next decade than what the price of oil does. That is, if Shell do not pivot their business model towards the green energy revolution in a big way.

Green energy

Shell’s revenue generation channels are still dominated by oil and gas. Despite the oil giant making the right sounds in terms of investments in green energy, it is yet to become a significant part of their income.

Indeed, there is no mention of clean or renewable energy in their last quarterly trading update which suggests significant revenue from clean energy is still along way off.

This will need to change as investors will likely soon become uneasy with the substantial PR effort dedicated to renewable energy and lack of activity on the income statement.

Shell has made a number investments in green energy, including the recent acquisition of EV charging provider Ubitricity, but much of these seem to be in the pursuit of becoming Net-Zero by 2050, as opposed to delivering shareholder value in the face of a declining oil business.

Investment in green energy will certainly help the Shell share price over long term but the market will punish Shell shares in the short term if the oil price falters.