Over the past year, Shell (LSE:SHEL) has been one of the best-performing stocks in the FTSE 100. Up over 36% in this period, it has benefited from the volatility in commodity prices, namely oil and gas. With some forecasting that oil (both WTI and Brent) could be set to climb above $100 per bbl again in 2023, could the Shell share price be set for further gains?
The correlation with oil prices
Shell is one of the largest extractors of oil globally. It accounts for oil within the Upstream division, which is the largest contributor of revenue for the business. For example, in the Q3 results, it contributed $5.9bn of total adjusted earnings of $9.4bn.
As Shell is vertically integrated, it deals with both oil and gas from exploration phases all the way through to the end product. Shell even has petrol garages, meaning that it controls the entire process end to end. Even though this is efficient, the success of the firm is still tied to the price movement of the raw commodities.
In fact, a good amount of the jump in 2022 earnings was down to the move higher in the oil price. At the end of last year, WTI Crude was trading at $76 per bbl. This jumped to $120 in early March 2022 and stayed in the $100-$120 range until July. It currently trades at $72.
Q2 earnings felt this surge in price, with adjusted earnings jumping to a whopping $11.4bn. The fall in both the oil and natural gas price in Q3 was shown by the drop in earnings. Given the move lower in Q4, I’d also expect the next quarterly result to be underwhelming.
Looking to 2023
Yet I think there’s a good chance of oil prices rising again next year. Firstly, I think the easing of Covid-19 restrictions in China will boost economic output. As one of the largest consumers of oil and gas, this will mean higher demand. I also expect stronger demand from the aviation industry as the sector continues to recover.
On the flipside, Russian oil exports are being shunned by many developed nations as a retaliation for the country’s actions in Ukraine. This in part restricts global supply. Even though OPEC can adjust for this, it’s something that still impacts the price.
The risk to my view is if we see another large producer (such as an Arab state or the US) flood the market with supply. Or if renewable energy usage speeds up at a pace quicker than I expect.
Good signs for Shell
If oil does indeed rally again, I think the Shell share price can continue to push higher. If I want to pick a stock for income potential, the business looks very appealing.
The current dividend yield of 3.52% isn’t massively juicy. But with higher earnings, the company is paying out regular quarterly dividends. If anything, I think the dividend per share could rise next year, boosting the yield further.
Even without the yield rising, a higher share price would add to my profits. Although I doubt we’ll see a share price rise quite like 2022, I think that there’s definitely room to run higher. I’m thinking seriously about adding the stock to my portfolio.
