Use the dip in Woodside to gain upside exposure to the oil price

Oil extraction

A sea of red as the ASX20 finished down 155 points today at 7318, with all sectors losing ground on the day.

The Energy and Mining sectors led the wipe-out over fears for the outlook of crucial commodity and energy exports as the Covid-19 lockdown in Shanghai enters its fourth week and looks set to spread to Beijing after a mass testing blitz.

One of the heaviest drags on the index was Woodside Petroleum (WPL) which closed 4.58% lower at $30.60. Despite the release of first-quarter earnings today that showed sales of $3.3 billion, more than double the same period last year but down on the December quarter due to lower trading activity as the Russian invasion of Ukraine created “unprecedented volatility.”

Woodside’s average realised price rose to $US93 a barrel of oil equivalent, more than double the same period last year. The strength in cash generation is likely to continue, with CEO Meg O’Neill saying, “We expect in the second quarter to see the continued benefit of stronger pricing, reflecting the oil price lag in many of our LNG contracts.”

Although the oil market first needs to negotiate the headwinds from the Covid-19 lockdowns in China, the crude oil market remains tight and structurally undersupplied.

Technically, once the current correction is complete, crude oil should retest its March $130 p/b high. This would almost certainly become a formality should the European Union impose an oil import embargo on Russian crude oil, which it does appear to be edging closer to doing.

Based on the backdrop outlined above, we like buying Woodside Petroleum (WPL) near its closing price of $30.60. The stop loss would be placed at $27.60, and the target is $36.00.

Woodside Daily chart

Source Tradingview. The figures stated are as of April 26th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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