Some people think they like oil stocks Shell (LSE:SHEL) are perfectly correlated with the price of oil. Although higher oil prices are beneficial for the company, it is not so simple to say that a drop in oil prices – for example in connection with a potential resolution of the conflict in the Middle East – will significantly harm Shell’s share price. But why?

The engine is running

The most vital thing to pay attention to is how Shell actually makes money. There are three main ways to generate revenue. First, there is upstream, where Shell extracts crude oil and natural gas. It is most exposed to the impact of commodity prices. When the price of oil rises, Shell’s realized prices raise almost one-to-one. However, costs don’t change that quickly, so profit margins skyrocket.

The second is integrated gas (including LNG), probably the jewel in the crown. Shell is one of the world’s largest LNG traders. This element is only partially related to oil prices.

The third (and final) is the downstream process, which includes elements such as refining. In this segment, it is less about price and more about volume. For example, this is advantageous when refining margins are high.

Understanding these revenue areas helps demonstrate that while Shell remains significantly exposed to oil prices through the upstream sector, it is less exposed than in previous economic cycles. In fact, I read that the downstream part of the company may do even better with lower oil prices because it sometimes improves refining margins and increases demand.

A realistic view

If we can get a solution in the Middle East, the fall in oil prices will negatively impact Shell’s profits. However, given the company’s current setup, I don’t see this as a huge risk. Moreover, it is less about the decline in oil and more about the extent of any movement. Shell still generated billions of dollars in profit in the fourth quarter of 2025 and free cash flow of $26 billion for the full year, even with oil prices much lower than today. Therefore, it can clearly survive (and remain profitable) even if oil prices fall to these levels.

Of course, I’m not pretending that much of this year’s stock price gain isn’t due to higher oil prices. Over the last year, the company’s shares have already increased by 33%. But with a price-to-earnings ratio of 13.87, it is less than FTSE100 average 16.2. Therefore, any potential impact of falling oil prices can be mitigated as it is already perceived as undervalued.

Looking ahead, I really think a final resolution to the conflict is coming, which should lower the price of oil. However, I don’t think the Shell is as exposed as some suggest. Therefore, if we actually see a decline in the stock at this point, I will put it on my watchlist as a stock to consider buying.

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Jon Smith has no position in the stocks mentioned