With the S&P/ASX 200 Index (ASX: XJO) enduring a brutal month so far this March, investors are understandably looking for ways to protect their portfolios. One sector that keeps surfacing in those discussions is energy. ASX oil stocks have had a strong run lately, buoyed by surging crude prices amid the escalating geopolitical situation in the Middle East. But does that actually make oil stocks a reliable shield for one's portfolio if the broader market continues to slide?
It's a question worthy of careful consideration before you pile in.
The logic behind owning oil stocks during a time like this isn't unreasonable. Energy is a genuine necessity. Economies run on oil and gas regardless of what stocks markets happen to be doing. On top of that, the US-Iran war is pushing oil prices, and therefore ASX oil stocks, higher while other corners of the markets are getting hammered.
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Energy shares surge as markets drop
As tensions in the Middle East continue to escalate, it is clear that the world is on the cusp of a severe energy crisis. So, it makes sense that many investors might assume that companies that own huge reserves of oil and gas are a safe harbour to park their capital in right now.
We've already seen massive gains in the ASX's energy sector. Our largest listed energy stock, Woodside Energy Group Ltd (ASX: WDS), has risen by more than 27% over the past month. Santos Ltd (ASX: STO) is up 18.7%, while Beach Energy Ltd (ASX: BPT) has leapt 16.85%. One of the most lucrative investments has been the BetaShares Crude Oil Index Complex ETF (ASX: OOO). This exchange-traded fund (ETF) has rocketed 56% since this time last month.
Given that the ASX 200 has fallen by a nasty 7.44% over the same period, it is obvious that these stocks have indeed protected many investors' portfolios from this downturn.
But what about the future?
Is it too late to buy ASX oil stocks?
Well, I can't give you a definitive answer on that. There is arguably a good chance that ASX oil stocks will continue to outperform the broader market for as long as this energy crisis lasts.
But there are a few caveats to keep in mind before you rush out and buy Woodside, Beach or Santos shares. Firstly, prolonged energy shocks have often caused recessions in the past, most notably during the 1970s and '80s. Global recessions typically see demand for energy fall off a cliff, and prices with it. If energy prices end up collapsing thanks to a global downturn, the share prices of ASX oil stocks will not be safe. To illustrate, Woodside shares lost more than 50% of their value between May and December of 2008.
Energy stocks are not recession proof companies, or even recession resistant. Indeed, past energy shocks have only been balanced out by demand collapsing. Now, I don't know if that's what's in store in 2026. But history tells us it is a possibility that cannot be discounted.
Zooming out though, I think investors are better off not even trying to play these games. As Warren Buffett says, "If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes". The best companies survive the bad times and thrive during the good. If investors focus on finding those companies instead of trying to time the perfect oil stock trade, they will probably be better off when this crisis is in the rear-view mirror.
