Does a falling oil price open up a buying opportunity for Woodside?

Oil prices have been trading below US$100 a barrel since late August and below pre-invasion levels of US$97. Most of the weakness has been tied to rising recession risks, lockdowns in China and a surging US dollar, which typically weighs on commodity prices.

Still, oil stocks like Woodside (ASX: WDS) have managed to stay mostly range bound.

Woodside price chart (Source: TradingView)

Perhaps what's most interesting is the diverging performance between oil stocks and oil prices. Ever since late July, Woodside shares have held up relatively well as oil prices deteriorated.

When oil hit a 6-month low of US$92 in mid-August, Woodside shares were mostly unchanged and sitting around $32 a share. As oil bounced back above US$100 in late August, Woodside shares rallied to a high of $36.76, a level not seen since January 2020.

Now, as oil retreats to the low US$90s, Woodside remains around $32. If Woodside and oil were still correlated, the stock would realistically be trading around $26-27.

Is less effort needed from oil to inspire more upside from Woodside?

Woodside versus oil (orange) price chart (Source: TradingView)

Oil supply to remain tight

Analysts at Wells Fargo believe that sinking inventory levels will likely limit any additional downside to oil prices.

The chart below shows two variations of US oil inventories, broken down by days of supply.

• Red dashed line: US commercial oil inventories at approximately 25 days of supply, which is a two-year low

• Solid purple line: Adds the US Strategic Petroleum Reserve (SPR) to commercial inventories. The two combined have approximately 55 days of supply on hand, the lowest level in 21 years

Source: Wells Fargo

"The bottom line is that oil prices have started to slide recently as the global economy flirts with recession. Even with recession at hand and demand softening, oil inventories remain quite low, particularly in the US," said Wells Fargo.

"Short of a deep global recession, which is not our base case, we believe that additional oil price declines will likely be limited from here."

OPEC in the background

Earlier this month, OPEC and its allies announced a largely symbolic 100,000 barrels a day production cut to support oil prices.

The cut "sends a bullish signal about a willingness to reduce output to support higher price objectives," said S&P Global Platts analyst Nareeka Ahir.

Broker views

Citi and Credit Suisse were both Buy rated on Woodside shares, according to notes released this month.

Citi upgraded the stock to Buy with a $36.50 target price, expecting Woodside to greatly benefit from LNG sales on the spot market.

Credit Suisse retained a Buy rating with a $37.69 target price, citing further strength in LNG prices which could add as much as $7-8 per share.