Three reasons you should invest in Royal Dutch Shell despite Doha failure

The 17 April meeting of Opec and Russian oil ministers in Doha, Qatar ended without the long-awaited agreement to freeze crude oil output.

Apparently Saudi Arabia, by far the largest oil producer inOpec, refused to agree to freeze oil production volumes without cooperation from its regional political foe, Iran.

Unsurprisingly, the oil price has fallen back on this non-agreement announcement. But so far, at over $42 per barrel, the benchmark Brent crude oil price remains around 40% above its mid-January low of under $30 (Chart 1).

End of the road for oil companies? Don't be so quick

Many analysts have predicted that this is now the end of the road for the current rally in oil prices. But I would not be so sure. Yes, in the very short-term this will no doubt dampen investors' enthusiasm for the black gold. But we should perhaps also take account of a number of key facts.

1. World oil supply is already falling even without an agreement

Over the first quarter of this year, global daily oil supply was some 96.35m barrels of oil per day. This is nearly 1m barrels below the Q4 2015 average of 97.23m barrels per day. So oil supply is already falling.

This decline is largely due to falls in production outside the Opec nations, most notable from lower onshore shale oil production in the US as lower oil prices have forced oil companies to cut back on investment on new oil wells.

Even without a freeze in oil production by the Opec nations, global oil production should continue to fall further, as it is still simply not economical in most countries to drill new oil wells at the current $40-odd oil price.

2. Even Opec oil production fell in March

Interestingly, even without an agreement on freezing oil production, Opec oil production actually fell by 90,000 barrels per day in March as interruptions to oil production in Nigeria, the United Arab Emirates and Iraq more than offset increases from Iran (post-sanctions).

3. Global oil demand is still growing

Yes, demand for the black stuff is not growing this year as fast as in 2015 (when oil demand grew by 1.8m barrels per day), but it is still growing by an estimated 1.2m barrels per day over this year.

Remember, emerging economies like China and India are still becoming more middle-class, and thus buying more cars and consuming more petrol as a result. Even with the increasing acceptance of electric vehicles, the vast majority of cars and trucks bought today are still powered by petrol or diesel.

All of which means that according to the International Energy Agency (IEA), the world oil market should see global supply and demand back in balance by the end of this year.

My personal suspicion is that the IEA may even be underestimating the speed of decline in US onshore shale oil production, and so this balance might be reached even sooner.

And there is still a decent chance that Russia and the Opec nations may still reach an agreement to freeze their oil production in the next couple of months, as they are all fairly desperate to see higher oil prices, and thus higher oil revenues flowing into their state coffers.

Buying opportunity coming in oil companies?

As the oil price falls back on this news, so do the share prices of UK-listed oil companies like BP and Royal Dutch Shell.

European oil companies have risen on average 18% from the mid-February lows (Chart 4), but remain 22% off their mid-2015 highs.

The UK-listed oil giants BP and Royal Dutch Shell have been part of this share price recovery, but remain cheap in valuation terms versus the FTSE 100 index.

As Table 5 shows, both BP and Shell offer an annual income from dividends of over 7% per year (Dividend Yield), and also remain cheap relative to the accounting value of their assets (with Price/Book valuations of under 1).

Any further rise in oil prices over the remainder of this year could help not only oil producers like BP and Shell, but could also be better news for oil service companies, who provide all manner of services to these oil majors.

Bottom line: Any fall in oil company share prices on the back of this weekend's Doha news could be a good buying opportunity.

Investors may wish to look at both Royal Dutch Shell (RDSA) and Amec Foster Wheeler (AMFW) in closer detail to benefit from any long-term improvement in oil prices.