Some people think that oil stocks like Shell (LSE:SHEL) are perfectly correlated to the oil price. Even though higher oil prices benefit the company, it’s not as simple as saying that a fall in oil prices — for example, due to a potential resolution of the conflict in the Middle East — will materially hurt the Shell share price. But why?

The engine cogs

The big point to note is how Shell actually makes money. There are three main ways it generates revenue. First, there’s upstream, where Shell produces oil and natural gas. This is the most directly exposed to commodity prices. When the oil price rises, Shell’s realised prices rise almost one-for-one. However, costs don’t move nearly as fast, so the profit margin expands sharply.

Second is integrated gas (which includes LNG), arguably the crown jewel. Shell is one of the world’s largest LNG traders. This element is only partly connected to oil prices.

Third (and final) is downstream, which includes elements like refining. This segment is less about price and more volume-driven instead. For example, it benefits when refining margins are strong.

Understanding these revenue areas helps show that, even though Shell is still meaningfully exposed to oil prices via upstream, it’s less exposed than in previous economic cycles. In fact, I read that the downstream part of the company can even do better with lower oil prices, as it sometimes improves refining margins and boosts demand.

A realistic view

Should we get a resolution in the Middle East, a fall in the oil price will negatively impact Shell’s profits. However, based on the current company setup, I don’t see it as being a huge risk. Further, it’s less about oil falling and more about the extent of any move. Shell was still generating billions in profit in Q4 2025 and free cash flow of $26bn for the full year, even with oil prices substantially lower than they are now. Therefore, it can clearly survive (and remain profitable) even if oil prices fall back to these levels.

Of course, I’m not pretending that a good chunk of this year’s share price rally isn’t due to higher oil prices. The stock is now up 33% over the past year. But with a price-to-earnings ratio of 13.87, it’s below the FTSE 100 average of 16.2. Therefore, any potential hit from a fall in oil could be cushioned because it’s already viewed as undervalued.

Looking ahead, I do think that an eventual resolution to the conflict is coming, which should lower the price of oil. However, I don’t think Shell is as exposed as some suggest. Therefore, if we do see a move lower in the stock at that point, I have it on my watchlist as a stock to consider buying.

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Jon Smith has no positions in the shares mentioned