Has the Woodside share price finally topped out?

The Woodside Energy Group Ltd (ASX: WDS) share price is down 1.72% today to $33.17.

The oil and gas giant has had a ripper year in 2022 so far. The Woodside share price is up 48% year to date.

This is largely a result of surging commodity prices on the back of global supply disruptions. In part, this is due to the Russia-Ukraine war.

When did the Woodside share price reach its top?

Surging commodity prices were a major factor behind Woodside’s outstanding half-year FY22 results.

On 30 August, Woodside announced a 400% profit surge and declared the largest interim dividend since 2014. The dividend was triple the size of the interim dividend paid for the 1H FY21.

Not surprisingly, the Woodside share price screamed up to a multi-year high of $36.68 on the same day. The last time it traded at this level was in January 2020 before COVID-19 hit.

So, is that the top we’re likely to see for Woodside shares in 2022?

Demand for oil and gas now easing back

As we all know, the share prices of energy and resources companies tend to follow commodity prices.

If commodity prices go up, so do the shares, as we have seen all year. When they go down, the stocks follow.

Trading Economics reports that WTI crude futures fell by almost 3% to below US$89 per barrel overnight. The price was about US$101 per barrel a month ago and about US$120 per barrel back in March.

The pressure is coming from a continuously rising US dollar. The currency is going up due to rising US interest rates, which is making oil more expensive for buyers using other currencies. With supply/demand the same though, the oil price is having to pull back to find willing buyers.

A fresh round of COVID infections in China is also causing concern that more lockdowns are ahead for the world’s second-biggest consumer of oil. That will reduce demand.

Gas prices are on the same track.

Trading Economics also reports US natural gas futures falling below $7/MMBtu for a 10th consecutive session. The natural gas price closed at a three-month low of $6.3/MMBtu on 3 October.

That’s well below the 14-year high of $9.65/MMBtu reached in August.

Gas production is at record levels and milder weather than usual means more of it is going into storage.

‘Bearish’ oil outlook for 2023, says expert

Chris Watling, CEO and chief market strategist at independent London research house Longview Economics, said the recent OPEC+ decision to cut oil production by two million barrels per day from November — the largest cut since April 2020 — didn’t boost the oil price that much.

Watling says that’s because “in reality, about half of the announced cut will actually be delivered”.

Watling wrote on Livewire:

Only five OPEC+ members are at their production quota level (Saudi, Iraq, the UAE, Kuwait, and Algeria).

They are therefore the only countries that will be expected/likely to comply & cut output. Every other OPEC+ member is already producing well below their quota and will not have to implement cuts …

As such, based on the allocation of cuts to each member, the maximum cut is likely to be 1.1 mbpd.

Watling says “significant supply surpluses are still likely next year”. In a US or global recession, demand will likely fall faster than supply.

He added:

In that context … the OPEC supply response is likely too slow/behind the curve.

In our forecast, we show demand troughing in Q1 2023. Naturally, it’s plausible that the sharp fall in oil demand will occur later (e.g. in Q2 or Q3). That would push back/delay the peak in surplus supply.

Overall, therefore, the outlook for oil prices remains bearish in 2023 and adds to our expectation that inflation will likely fall/ease off over the coming months.

In a separate article on Livewire, Morgan Stanley has the most bullish oil price target of US$100 per barrel for Brent Crude. The broker reckons oil will rebound to that price by the first quarter of next year.

Morgan Stanley strategist Martjin Rats said:

This quota reduction is somewhat at odds with global crude oil inventories that are already low, and mostly still trending lower. OPEC+ also mentioned a need to put a floor under prices in order to support investment levels, which it continues to argue are woefully too low.

Has the Woodside share price topped out?

The outlook for gas is more relevant to the Woodside share price.

About 70% of Woodside’s assets are involved in gas production, and it’s now one of the top 10 LNG players in the world following its merger with the petroleum business of BHP Group Ltd (ASX: BHP).

The falling gas and oil prices will have an impact on earnings. So, yes, you could argue we may have seen a topping out in the Woodside share price for now.

The Australian reports that JP Morgan has cut its Woodside rating from overweight to neutral.

JPM analyst Mark Busuttil said Woodside was close to net present value.

He added: “Notwithstanding the macro risks, we remain broadly positive on the sector.”

But remember, the analysts are pretty focused on short-term movements. When they issue share price targets, for example, they’re for the next 12 months only. So, only somewhat relevant to long-term investors.

When it comes to the Woodside share price, there are larger, longer-term factors also impacting it.

Since the Ukraine invasion, there is growing sentiment in Europe to diversify away from Russia, which supplied the EU with 40% of its natural gas in 2021, according to bbc.com.

So, this could be a medium-term tailwind that keeps pushing the Woodside share price higher.

Not to mention the fact that those excellent half-year results included just one month’s worth of production from the BHP assets that Woodside officially acquired in June.

That production alone was 17% of Woodside’s total production for 1H FY22. Imagine what six months of production will do for Woodside’s earnings, with a potential flow-on effect on the share price.

Has the Woodside share price finally topped out?