Does an OPEC production cut present a buying opportunity for Woodside?

Tue 04 Oct 22, 10:41am (AEST)
Oil - Oil field site, in the evening, oil pumps are running
Source: iStock

Key Points

  • Expectations are high that OPEC will deliver the biggest production cut since the start of the pandemic
  • Oil prices have slumped -30% since June highs
  • Oil stocks have become less impacted by weak oil prices in recent months

Woodside (ASX: WDS) and energy stocks have become increasingly resilient against deteriorating oil prices and global economic growth concerns.

In recent weeks, oil has backpedaled to levels not seen since early January or around 10-14% below pre-invasion levels. One would assume that a deteriorating oil price environment would see a similar narrative play out for oil stocks. But that's hardly been the case.

Woodside shares are trading around March 2022 levels. The stock also went ex-dividend on 8 September for $1.60 or a yield of approximately 4.9%. To match early January levels, Woodside shares would need to fall another -25% to the $24 level.

Woodside vs oil price chart
Woodside versus oil price year-to-date comparison (Source: TradingView)

What to expect from OPEC

Brent crude rallied 3.9% overnight to US$88.6 a barrel amid rising expectations of a large cut to OPEC production.

The OPEC+ alliance is meeting for the first time in-person since the beginning of the pandemic on Wednesday to review just how much they will intervene in oil markets.

According to Bloomberg, delegates are considering an output cut of more than 1 million barrels a day, the largest cut since the start of the pandemic.

"While such a cut would occur amid one of the tightest markets in recorded history, and ahead of a potential decline in Russian exports later this year, such a decision could be justified by the recent large decline in prices, down 40% since their June peak," Goldman Sachs said in a note on Tuesday.

"The collapse in investor participation, driving liquidity and prices lower, is also a likely strong catalyst for such a cut, as it would increase the carry in oil and start to claw back investors who have instead turned to USD cash allocation following the aggressive Fed hikes," the analysts said.

Simply put, the production cuts are intended to bridge the gap between physical and paper markets by significantly tightening the physical market, which should provide prices with more defined floor, bring back liquidity and cover shorts.

"Such a cut, not assumed in our latest published balances, would reinforce our bullish price view while help limit the downside to prices should economic growth disappoint," said Goldman Sachs.

A bullish Woodside

Broker consensus is Buy rated for Woodside with a 12-month price target of $35.17.

Citi was one of the latest brokers to provide a note for Woodside, upgrading the stock from Neutral to Buy. The note was very focused on the upside for global gas markets and expects Woodside to benefit via its LNG sales on the spot market.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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