Energy

Oil prices are down 10% in two days: Outlook for 2023, Woodside price targets

Thu 05 Jan 23, 12:48pm (AEST)
Oil rig with gas pipeline
Source: iStock

Key Points

  • This is the worst start to a year for oil since 2007
  • The Office of the Chief Economist still expects oil prices to average US$90 a barrel in 2023
  • Brokers remain Buy or Neutral rated on Woodside with a $37.68 target price

After a turbulent year for oil prices, an almost 10% fall in two days might be another walk in the park for energy investors. However, China's ongoing battle against rising covid cases and deteriorating global PMIs has turned the once bullish oil narrative on its head.

Brent crude finished the 2022 calendar year up 5.5% at US$82.3 a barrel but its worth noting that prices fell -28.8% in the second-half. This weakness has followed through to 2023, with the past two days representing the worst start to a year since 2007.

Noteworthy headlines

On Tuesday, S&P Global said that Russian crude exports fell to a two-year low in December as "Moscow struggled to redirect to Asia oil displaced by sanctions in European and G7 countries."

On the same day, China raised its export quotas for refined oil products in its first batch for 2023, according to Reuters. Traders attributed the increase to expectations of poor domestic demand as the world's largest oil importer continues to struggle with rising covid infections.

In a separate report, S&P Global flagged that global factory output fell for a fifth consecutive month. It also noted an accelerated demand downturn, with changes in new orders falling at "a notably faster pace than output in recent months."

"Moreover, the spread between new orders and output widened further, to one of the largest on record, pointing to an increasing excess of operating capacity relative to current demand."

Outlook for oil prices

In its December quarterly report, the Australian Government's commodity forecaster, the Office of the Chief Economist said it expects oil prices to average US$90 a barrel in 2023 and US$77 a barrel in 2024.

"Consumption growth in 2023 will be hurt by three main elements: demand destruction as a result of high prices due to the Russian invasion of Ukraine, China’s COVID-19 policy, and a general world economic slowdown," it said.

"As these normalise, demand growth is expected to rise."

The report noted the releases from the US strategic petroleum reserve (SPR) as a 'critical driver of higher supply in recent months' and viewed its refilling as a potential catalyst that'll support oil prices over the outlook period.

US SPR
US Strategic Petroleum Reserves (Source: Resource and Energy December 2022)

Oil stocks versus oil prices

Energy stocks have held up much better than oil prices, with Woodside (ASX: WDS) shares up around 46.5% in the last twelve months compared to the -4.3% fall in crude prices. In the US, the S&P 500 Energy sector is up a similar 43.5% in the last twelve months.

Still, it's worth noting that they've both been struggling since late November.

WDS vs oil price chart
Woodside versus Brent crude (Source: TradingView)

The question is: Who is leading who? Will oil stocks eventually have to care about prices? Or are the stocks holding up on expectations that the demand side will soon normalise?

Broker views: Woodside

The latest coverage for Woodside (early December) remains mostly buy rated with a positive target price.

  • Buy-rated brokers: Credit Suisse, Morgan Stanley and Citi

  • Neutral-rated brokers: Morgans, Macquarie, Ord Minnett, UBS

The average price target among the seven brokers is $37.68. The highest was Morgan Stanley ($41.00) and the lowest was UBS ($34.00).

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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