Oil prices fluctuated in 2024, influenced by shifting demand, OPEC production cuts, and geopolitical tensions.
Increased supply from non-OPEC countries and slowing economic growth mean the oil price is down from its high in October 2023. Nonetheless, it remains well above 2020-21 levels and is expected to remain relatively stable going into 2025 as global production is predicted to match consumption closely.
Unexpected disruptions, such as changes in OPEC production policies, could result in sharper movements in oil prices. However, non-OPEC countries such as the United States and Brazil are expected to increase production, which may help cap significant price increases.
So, how can you benefit from oil prices as an investor? One way is to invest in ASX oil stocks.
What are ASX oil shares?
Oil stocks are shares of companies involved in extracting and producing petroleum, a fossil fuel found in underground pools, reservoirs, or near the surface of oil sands. Petroleum, or crude oil, is used in everything from plastics and asphalt to transport fuels, heating and electricity generation.
Producers remove crude oil from the ground and send it to a refinery to be separated into usable petroleum products. Currently, the primary source of global energy production, oil is a commodity traded globally, and investors speculate on its price via various financial instruments. Like all commodities, oil prices can be volatile and are driven primarily by the balance of supply and demand.
The need for oil for everything from electricity generation to petrol drives demand.
The powerful Organization of the Petroleum Exporting Countries (OPEC) somewhat controls supply. This intergovernmental organisation coordinates petroleum policies among 13 member countries, including Iraq, Iran, Kuwait, Saudi Arabia, Venezuela, Libya, and the United Arab Emirates.
Why invest in ASX oil stocks?
When oil prices are high, investors in oil stocks can benefit from attractive dividends and share price appreciation. Oil remains a crucial energy source globally, particularly in the transportation, manufacturing and chemical industries, and global demand is expected to remain significant for years to come.
Although we are increasingly turning to renewable sources of energy generation, oil and gas remain in high demand as they have a massive infrastructure advantage and are typically cheaper than other fuels.
As a commodity, oil has historically served as a hedge against inflation. As prices of goods increase, the value of assets like oil often rises also. This means oil stocks can provide an effective way to preserve wealth during inflationary periods.
Top oil shares on the ASX
Several companies listed on the ASX can give investors exposure to oil prices. These companies find, extract, and produce petroleum.
Here are three top ASX oil stocks ranked by market capitalisation from high to low.
| Company | Description |
| Woodside Energy Group Ltd (ASX: WDS) | Oil and gas exploration and production company with worldwide operations |
| Santos Ltd (ASX: STO) | Oil and gas producer supplying Australia and Asia |
| Ampol Ltd (ASX: ALD) | Transport fuels supplier that refines, imports, and markets fuels and lubricants |
Woodside
An Australian oil and gas producer operating worldwide, Woodside merged with the petroleum business of BHP Group Ltd (ASX: BHP) in mid-2022. The company operates oil and gas fields off the coast of Western Australia, in the Gulf of Mexico, north of Trinidad, and south of Dakar.
In the half year to 30 June 2024, Woodside reported net profit after tax (NPAT) of $1,937 million and declared a fully franked interim dividend of US69 cents per share. During the half, the company achieved the first production from Sangomar, Senegal's first offshore oil project.
The company is also developing the Scarborough Energy Project in Western Australia, which will deliver natural gas in 2026. It is two-thirds complete and will include eight wells and a floating production unit, which can provide 8 million tonnes of liquefied natural gas annually.
Santos
Santos is one of Australia's largest oil and gas producers, with operations across Australia, the Asia-Pacific, and the United States. The company is primarily focused on the exploration, production, and distribution of natural gas, which is sold into the Australian market and exported to Asian markets.
Santas operates the Cooper Basin gas fields in South Australia, the GLNG gas field project in Queensland, and gas fields in Papua New Guinea and Timor Leste. Its Barossa gas project off Darwin is 80% complete, with the first gas expected in the third quarter of 2025. The company is also developing an oil drilling site and processing facility in Alaska, which is expected to provide the first oil in 2026.
Santos reported strong free cash flow in the half year to 30 June 2024, which allowed for a record dividend of US13 cents per share to be declared. Sales revenue for the period was US$2.711 billion.
Santos aims to achieve net-zero emissions by 2040. In line with this target, it seeks to decarbonise these fuels and produce clean fuels as customer demand evolves.
Ampol
A leader in transport fuels, Ampol operates Australia's largest branded petrol and convenience store network. It also refines, imports, and markets fuels and lubricants.
At 30 June 2024, Ampol had 1,766 Ampol branded services stations in Australia, 633 of which were company-operated sites. The company's refinery in Lytton, Queensland, is one of the major oil refineries in Australia. It processes crude oil to produce fuels for both domestic and international markets. Ampol also imports refined petroleum products to meet local demand.
Ampol acquired Z Energy in 2022, a New Zealand company that sells about 40% of all fuel in the country. Z Energy has approximately 200 service stations, 160 truck stops, and a network of pipelines, terminals, and other infrastructure. The benefits of the acquisition and business simplification process have been reflected in improved profitability following Ampol's first full year of ownership.
According to Ampol's 2023 climate report, demand for traditional transport fuels is expected to remain robust well into the 2030s.
What might the future hold for the Australian oil industry?
Australia produces oil from fields in its south-eastern region and offshore of northwestern Australia. The domestic industry has brought economic activity, export earnings, employment, and investment benefits.
Australian oil producers have developed expertise and innovations, including floating production systems, subsea production, and geophysics software.
Oil and gas companies will continue to provide vital energy sources for the foreseeable future. As part of the push towards cleaner energy, significant players in the industry are investing in carbon capture and storage facilities to lower emissions while maintaining output. This technology could help extend the lifespan of the oil industry as Australia moves towards decarbonisation.
Pros of investing in ASX oil shares
Dividends: When oil prices rise, oil companies generate significant cash flows. They can use this money to drill additional wells to increase production, repay debt, repurchase stock, and pay dividends, creating shareholder value. Because of the amount of cash oil companies generate during good times, dividend payments can be higher than average. This makes the sector attractive to investors seeking high dividend yields.
Inflation hedge: Oil prices tend to rise during periods of inflation. Investing in oil shares can act as a hedge, helping to preserve the purchasing power of your portfolio. As the prices of goods and services increase, oil prices often follow suit, benefiting oil producers and investors.
And the cons
Cyclicality: The oil sector tends to be cyclical, meaning investors will likely experience booms and busts. Potential disruptions to the global oil market, such as the Russian invasion of Ukraine, can impact crude prices.
Volatility: The price of oil is a significant factor in the valuation of oil shares. When prices are low, the stock market can punish these shares. If traders can predict the right direction, volatility can provide an excellent opportunity for profit. On the other hand, wild price swings make some investors uncomfortable.
Are ASX oil shares a good investment?
Oil companies can be very profitable, but investors in the sector must be aware of the risks.
Oil shares can be more volatile than the broader market as they are sensitive to changes in the price of the underlying commodity. Oil price crashes in 2014 and 2020 rocked the industry, with companies slashing dividends. Oil companies can also be exposed to legal and regulatory risks and accidents, such as oil spills at sea.
A growing world population means an increasing demand for energy and fuel. Although renewable energy is slowly becoming cheaper and more prevalent, investing in oil shares can still provide good returns.
Many Australian oil stocks are well-established with a history of paying dividends. Including oil shares in your portfolio may offer diversification benefits and act as an inflation hedge.
Oil-focused exchange-traded funds (ETFs) can provide exposure to oil price movements for investors who prefer not to invest in individual companies. While the world is moving away from fossil fuels, this is a long-term process. In the meantime, the oil industry continues to provide attractive investment opportunities.
