I recently explained why Coca-Cola HBC could be a FTSE 100 stock that’ll turn from a squib in 2019 to a full-fledged firework in 2020.
While the soft drinks giant has seen its share price stagnate this year, Royal Dutch Shell (LSE: RDSB) has performed even worse as growing fears over the global economy has prompted waves of investor selling. Its share price has fallen 9% so far in 2019 but, unlike the Coke maker, it’s not a company I’m tempted to buy for even a second.
The supply surge
Brent oil prices have grown steadily since plunging back under the critical $60 per barrel in late September. In fact the energy benchmark is about 10 bucks more expensive than it was at the start of the year. But market makers are fearing what 2020 holds for profits over at Shell and its peers as millions of barrels of unwanted material lurk on the horizon.
According to the International Energy Agency, supply from non-OPEC nations is about to surge. It estimates that these countries will pull 2.3m barrels of the black stuff out of the ground each day next year, up from the 1.8m barrels estimated for 2019, because of rising production from the US, Brazil, Norway, and Guyana. Shale production in the US in particular has surged in recent times, and is predicted to climb to 12.3bn barrels this year from the record 11bn barrels in 2018.
The OPEC+ group (that’s the OPEC cluster of nations plus a handful of other major producers like Russia, Mexico, and Kazakhstan) vowed to cut production again from 1 January at their latest meeting this month. Output will be reduced by an extra 500,000 barrels per day in the three months to March, with total cuts now estimated at 1.7m barrels.
Such action, though, threatens to be overshadowed by likely falls in energy consumption over the next year, as tough economic conditions in OECD nations and major emerging markets – environments that threaten to be worsened should US-led trade wars continue – cast a pall over the global oil demand outlook.
The IEA believes, for example, that the oil market will remain in surplus to the tune of 700,000 barrels a day in the first quarter. And as the boffins over at banking giant ING note: “[these] numbers do call into question how much more upside we could see in prices going into 2020, particularly given the fact that it will not take long for the market to focus on the larger surplus that is estimated over the second quarter in the absence of OPEC+ action”.
It doesn’t matter to me that Shell trades on a rock-bottom forward price-to-earnings ratio of 10 times and boasts a giant 7% corresponding dividend yield, too. The risk of more serious share price weakness in 2020 makes it a risk too far, and I for one won’t be buying in any time soon.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019