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Oil prices fell to their lowest level since 2021. Where next for Woodside?

The US Benchmark West Texas Intermediate Crude oil price fell to a low of $67 on 23 March – a level not seen since December 2021. Indications suggest there could be more downside.

Source: Bloomberg

On 17 March, WTI crude fell to $67per barrel and Brent to $73 – well down from 12 months’ prior when both benchmarks traded at over $100.

Over April, oil prices recovered to over $80. However, prices appear to be now on the way down, with WTI down to $67 on 28 April. Prices, it appears, could fall further.

Two of the largest influences over oil prices are demand and supply in the US – the world’s largest producer and consumer of oil.

US demand appears to have peaked

US gasoline demand peaked in 2016 at around 9.8 million barrels per day (MMBD), according to data from the US Energy Information Agency (EIA). In 2021, the post-Covid peak was 9.5 MMBD and in March this year, it is down to 8.8 MMBD.

Demand will likely fall further due to a small but increasing percentage of electric cars, which comprised 16% of all car sales in 2021. This structural change could be exacerbated by a slowing economy.

US supply has surged

According to the US Energy Information Agency (EIA), US production fell to 10.3 million barrels a day in 2020 and has since climbed to 12.3 million barrels a day in March 2022. That’s an addition of 2 million barrels a day and nearly double the 5.6 million barrels a day in March 2012.

Importantly, it appears that US production will continue to grow for the next several months, based on the rig count.

Rig count recovers

The US oil rig count – the number of rotary rigs drilling oil wells – fell from 670 at the beginning of 2020 to just 188 at the end of June 2020. This is significant because the majority of these wells’ lifetime production comes in the first three years. The shock of the drop in production from 2020 will likely begin wearing off.

Meanwhile, the oil rig count rose steadily through 2021 and hit 600 again in July 2022. As of 24 March, the Baker Hughes oil rig count was 593.

As it typically takes 3-6 months for oil wells to be completed, the increased number of oil-producing wells would only have started to have a significant impact from 2022 4Q and oil production will likely continue to rise through 2023.

The short-term outlook for oil could be bearish

While the US only produced 18.5% of the world’s oil in 2021, US producers do appear to be more likely to reduce production when oil prices fall. Right now, the US rig count is starting to fall, from a peak of 627 in November 2022 to 593 on 24 March. This 5% fall may not be significant. Or, it could be exploration and production companies seeing an oil glut developing and winding back.

As it is the exploration and production companies’ business to understand the market, it could be worth paying attention when they reduce their forward exposure to oil prices.

Woodside Petroleum has a high exposure to oil prices

Since taking over BHP’s oil business, Woodside Petroleum gained significant exposure to oil prices. Around 32% of Woodside’s production in 2022 4Q was oil and non-gas liquids.

On top of this, the Albanese government seems set to pass legislation putting a hard cap on Australia’s 215 largest greenhouse gas emitters and forcing them to reduce emissions by 4.9% per year. Woodside Energy is one of the unlucky 215. The new rules will likely increase the cost of developing new gas and oil fields and may make some fields uneconomic to develop.

Woodside shares have recovered slightly since their 20 March low, partly thanks to a sudden halt to Iraq (Kurdistan) oil exports on 25 March, sending oil prices higher. However, a resumption of oil exports, increased US supply, and reduced consumption could lead to lower oil prices in the short term.

Trading options and CFDs also offer leveraged exposure to shares with increased risk. Options and CFDs can also be used to bet on share prices falling.

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