Investing in ASX oil shares

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. 

Oil trends in 2025 and beyond

Oil is expected to remain part of the global energy mix for years, even as Australia steers toward its 2050 net-zero emissions target. According to the International Energy Agency (IEA), oil will continue to be used in hard-to-abate sectors like aviation, shipping and petrochemicals, although its long-term role will shrink considerably. Global oil demand is projected to drop from around 100 million barrels per day (bpd) today to 77 mbd in the coming decades, and potentially as low as 24 mbd by 2050, under net-zero scenarios.

Despite this decline, industry experts stress that achieving climate goals does not signal the immediate end of oil — rather a gradual, managed reduction. Forecasts from oil majors such as BP indicate demand may still only fall by 10–20% by 2040. For Australia, the Federal Government's Future Gas Strategy Analytical Report highlights that while the role of gas will also diminish over time, it remains crucial to ensuring a reliable and affordable energy transition, requiring ongoing development and more flexible infrastructure even in net-zero pathways.

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.

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. 

Woodside Energy Group delivered a standout performance in July, with its share price jumping 12.5% to $26.59 — vastly outperforming the ASX 200's 2.4% gain over the same period. The rally was supported by a 7.3% rise in Brent crude oil prices, and strong operational results from the company's Q2 update.

During the quarter, Woodside lifted production by 2% to 50.1 MMboe, while quarterly revenue climbed 8% year on year to US$3.28 billion. In addition, management upgraded its FY25 production outlook to 188–195 MMboe and trimmed unit cost guidance. 

CEO Meg O'Neill highlighted the exceptional performance of the Sangomar project, which hit 101,000 barrels/day at close to 100% reliability, underscoring operational momentum heading into the second half of the year.

Woodside also carries a strong dividend yield of 7.04%.

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. Operationally, Santos also reported a robust Q2 update, posting higher production, sales volumes and free cash flow. Key growth projects such as Barossa (97% complete, first gas expected Q3 2025) and Pikka (89% complete, first oil expected mid-2026) are on track and could lift output by ~30% in coming years.

Santos has delivered a strong 16% year-to-date gain in 2025, with shares climbing from $6.77 to $7.80. This increase was boosted in large part by a $30 billion takeover bid from the XRG Consortium, valuing the company at ~$8.89 per share. While regulatory approvals are still pending, the acquisition appears to be progressing and has lifted investor sentiment.

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. 

Ampol shares have had a tough run in 2025, down almost 20% year to date following a disappointing FY24 result and pressure from geopolitical tariff developments. Despite this, Macquarie has maintained its neutral rating, while lifting its 12-month price target from $23.50 to $27.50, reflecting a modest 2.3% upside from current levels.

The broker's upgraded outlook is driven by stronger-than-expected refining margins at Ampol's Lytton refinery, prompting a boost to its 2025 earnings forecasts. Macquarie is now expecting 1H Lytton EBIT of $18m (vs a previous loss) and has roughly doubled its 2H EBIT estimate to $65m. 

Looking ahead, the broker highlights potential catalysts including disciplined M&A, particularly if EG Group sells its 500+ Australian sites, and renewed takeover interest in Ampol itself, noting that Canadian giant Couche-Tard previously made an approach in 2019/20. 

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 

1. 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.

2. 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. 

3. Global energy demand support

Even as the world transitions to renewables, oil demand from transport, petrochemicals and emerging markets is expected to remain resilient in the medium term, underpinning earnings for major producers.

4. Exposure to Australian export strength

Many ASX oil and gas companies (including LNG producers) benefit from strong export demand in Asia, creating access to global income streams beyond the local economy.

And the cons

1. 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. 

2. 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.  

3. Regulatory and environmental risk

Oil producers face increasing scrutiny, higher compliance costs, and potential carbon pricing or regulatory changes as governments pursue net-zero emissions targets.

4. Capital-intensive operations

Exploration and production require significant upfront investment, which can impact free cash flow during low-price environments and lead to higher debt loads.

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.