Why is the Woodside share price beating the ASX 200 on Monday?

Energy prices are forecast to remain elevated and volatile for years.

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Key points

  • Woodside share price outperforming ASX 200 with oil prices up from Friday's close
  • Coordinated bans on Russian oil could keep oil prices higher for years
  • Major energy companies are returning profits to shareholders rather than splashing cash on new projects

The Woodside Petroleum Limited (ASX: WPL) share price is handily outperforming the S&P/ASX 200 Index (ASX: XJO) today, though shares have just slipped into the red.

Woodside shares closed on Friday at $31.39 and are currently trading for $31.40, up 0.03% after earlier posting intraday gains of 1.3%.

This comes as the ASX 200 succumbs to another day of selling, following weakness in US markets on Friday. At time of writing the ASX 200 is down 1.29%.

So, why is the Woodside share price outperforming?

Tailwinds for Woodside share price amid tight supply outlook

While crude oil prices have retraced 0.6% over the past 24 hours, with Brent crude currently trading for US$112.80 per barrel, Brent is up 1.90% from where it was during Friday’s trade.

That could be offering some tailwinds for the Woodside share price and the wider energy sector.

ASX investors may also be looking beyond the daily price moves to the longer-term outlook for energy prices.

On the negative side of the picture for oil prices, China’s COVID-zero policies could see the world’s number two economy undergo lengthy, economy crippling lockdowns. This will have a big impact on the nation’s energy demands. But most likely only in the short to medium-term.

Longer-term, the world is increasingly working together to take Russian oil exports off the market to punish the nation for its invasion of Ukraine.

The European Union, consisting of 27 nations, is working out the last kinks in its plan to ban Russian crude oil over the next six months. Joining the EU’s efforts, the Group of Seven (G7) – Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – have also pledged to stop importing Russian oil.

Once these bans are put into place, you can imagine the EU and G7 will up the pressure on other nations to follow suit, taking a large chunk of the global energy supply out of the market.

That will likely keep oil and gas prices elevated and help support the Woodside share price.

Energy majors not opening up the spigots

With crude oil prices having hit 13-year highs earlier this year, you’d think the big oil companies might be spending big on exploring for and drilling new fields.

But that’s not the case. Rather than splashing cash on new projects, energy companies are increasingly returning profits to shareholders via buybacks and increased dividends.

Woodside shares, for example, offer a 6% trailing dividend yield, fully franked.

Commenting on the shift in tactics, Noah Barrett, lead energy analyst at Janus Henderson said (quoted by Bloomberg):

In prior cycles of high oil prices, the majors would be investing heavily in long-cycle deep-water projects that wouldn’t see production for many years. Those type of projects are just off the table right now.

“Discipline is the order of the day,” said BP’s CEO, Bernard Looney.

Indeed, according to data compiled by Bloomberg, when oil was consistently trading for more than US$100 per barrel back in 2013, the big oil companies’ combined capex was US$158.7 billion. That’s almost double what these companies are spending today.

Cautioning of longer-term elevated energy prices, which could help boost the Woodside share price, Joseph McMonigle, secretary general of the International Energy Forum said, “Two years in a row of large and abrupt underinvestment in oil and gas development is a recipe for higher prices and volatility later this decade.”

Barrett added, “For so long the industry has been told by investors and politicians we need less oil and executives remember that. If the world needs an extra million barrels a day to ease prices, I’m not sure where it will come from.”

Woodside share price snapshot

Benefiting from soaring energy prices, the Woodside share price is up 44% so far in 2022. That compares to a year-to-date loss of 4% posted by the ASX 200.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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