The oil price has spiked by more than 20% over the past two weeks. It was trading back above $100 per bbl last Thursday (23 July). Escalating tensions again in the Middle East are the main driver behind this move. A higher oil price acts as a benefit for some FTSE 100 stocks. And one in particular is on my mind right now.
Strong gains
I’m talking about Shell (LSE:SHEL). The stock is up 23% over the past year. For an integrated oil major like Shell, higher oil prices are generally positive. That’s because its upstream business receives more revenue for every barrel of oil and gas it produces. Although production costs remain broadly unchanged, selling each barrel at a higher price means operating margins expand. That’s why cash flow can increase dramatically during periods of elevated commodity prices.
The share price move over the past year partly reflects the benefit it’s already gained from higher oil prices since early spring. However, the share price performance isn’t solely down to oil prices. Management has continued to prioritise shareholder returns through an aggressive buyback programme and a growing dividend, made possible by exceptional free cash flow generation.
For perspective, Shell reported underlying operating cash generation of $17.2bn for Q1 2026, backed by a whopping $26.1bn in full-year free cash flow for 2025. The dividend yield is 3.26%. Even though it isn’t crazy high, it’s enough to attract investors, especially with the likelihood of a higher dividend in the future.
A lagged benefit
The stock has popped 14% in the past month, mostly reflecting anticipation of higher earnings from the oil move. Yet it’s important to note there’s a lag between oil moving and Shell getting the benefit. Some production is sold under contract months in advance. As a result, it can take anywhere from one quarter to two quarters before sustained changes in oil prices are fully reflected in financial results.
Ultimately, the point I’m making here is that the share price has moved in anticipation of higher earnings. But this needs to be treated with caution, as some might be jumping the gun a little.
The direction from here
From here, I see two main scenarios. The first is if oil prices continue to move higher in the coming months. This could see the continuation of a strong move for Shell stock. I believe it still has plenty of room to jump, especially because I don’t think the valuation looks stretched. Shell has a price-to-earnings ratio of just over 14, below the FTSE 100 average. If oil prices stay high and the natural gas market picks up heading into winter, earnings expectations could move higher.
The other scenario is if oil prices fall sharply. After all, oil markets have a habit of reversing as quickly as they rally, particularly if geopolitical tensions ease or global economic growth slows. Shell also faces ongoing political and regulatory pressure surrounding fossil fuel investment.
Overall, the share price has already felt the benefit of higher oil prices. Yet for those who have the view that oil is heading higher for a long period, I believe it’s a stock to consider as it’s well placed in the sector to outperform.
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Jon Smith does not hold any positions in the companies
