The oil price has eased somewhat in 2023, reflecting a fall in global demand as interest rate hikes take effect. However, modest price increases are forecast over the second half of the year, thanks to a decline in global oil inventories.
How can you benefit from rising 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 useable 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 is crucial to economic activity. It provides a vital source of energy to power the global economy.
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.
The oil price soared in early 2022 due to the conflict in Ukraine. Russia (which faced sanctions from other countries) produces 12% of the world's oil.
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 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|
An Australian oil and gas producer with worldwide operations, Woodside has two production facilities in Australia. One is located over the Vincent oil field in Western Australia, and a floating facility is moored between the Wanaea and Cossack oil fields off the coast of Western Australia.
The company merged with the petroleum business of BHP Group Ltd (ASX: BHP) in mid-2022. The merger promised to deliver increased scale and diversity, providing resilience as Woodside navigates the energy transition.
According to the CEO, Woodside is well-positioned as a high-margin, high-yield business generating solid returns today. It will continue to do so as the company realises its pipeline of development opportunities for 2027 onwards.
Santos produces oil and gas across five core assets. The Cooper Basin on the South Australia and Queensland border is Australia's most extensive onshore oil and gas field development. The company also operates in WA, the Northern Territory, Timor-Leste, and Papua New Guinea.
Santos reported robust sales revenue of US$1.3 billion in the second quarter of 2023. Despite the volatile oil price environment, the company delivered a solid quarter of production and cash flow generation.
Santos aims to achieve net-zero emissions by 2040 while delivering strong shareholder returns. Given heightened customer demand now and into the future, Santos will seek to backfill and sustain its core assets to deliver the critical fuels the world needs into the 2040s. But it will also decarbonise these critical fuels, in line with its net-zero emissions target by 2040, and produce clean fuels as customer demand evolves.
A leader in transport fuels, Ampol supplies Australia's largest branded petrol and convenience store network. It also refines, imports, and markets fuels and lubricants.
Ampol had a successful and transformational year in 2021. It delivered a strong financial and operational performance while executing established growth strategies and laying the foundations to transform the business as energy markets evolve.
In May 2022, Ampol acquired Z Energy, a New Zealand company that sells about 40% of all fuel across New Zealand. Z Energy has approximately 200 service stations, 160 truck stops, and a network of pipelines, terminals, and other infrastructure across the country. This was significant progress in Ampol's strategic objective of regional market leadership.
Ampol reported a strong performance for the first half of 2023, with fuel sales volume up 24%, including a full six months' contribution from Z Energy. Demand for traditional transport fuels is expected to remain robust well into the 2030s, according to Ampol's 2023 climate report. The report reveals Ampol has made good progress on its future energy and decarbonisation strategies, building strategic partnerships to accelerate electric vehicle solutions, among other initiatives.
What might the future hold for the Australian oil industry?
Australia produces oil from fields in the country's south-eastern region and offshore of north-western 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 the use of geophysics software.
In the post-pandemic world, oil companies will continue providing a vital energy source. The COVID-19 outbreak negatively impacted operations due to lower crude oil prices. However, the global economic recovery and current supply pressures have resulted in a spike in prices in the worldwide oil market.
High realised prices, expected to continue in the near term, have buoyed revenue figures for oil companies. Over the longer term, quickly adapting to changing market fundamentals will be critical to the Australian oil industry's success.
The industry, as a whole, is transitioning as the world moves towards a low-carbon future. Oil companies increasingly emphasise their environmental, social, and corporate governance (ESG) credentials, which are critical to long-term survival.
Pros of investing in ASX oil shares
Capital gains and dividends: Oil companies generate significant cash flows when oil prices rise. They can use this money to drill additional wells to increase production, repay debt, repurchase stock, and pay dividends, creating shareholder value. Dividend payments can be higher than average because of the amount of cash oil companies generate during good times. This makes the sector attractive to investors seeking high dividend yields.
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. Volatility can provide an excellent opportunity for traders to profit if they can predict the right direction. On the other hand, wild price swings make some investors uncomfortable.
Are ASX oil shares a good investment?
Oil companies can be very profitable and have benefitted from recent high prices. 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. Price crashes in 2014 and 2020 rocked the industry, with companies slashing dividends. Oil companies can also be exposed to legal and regulatory risks of accidents, such as oil spills at sea.
A growing world population means increasing demand for energy and fuel. Although renewable energy is slowly becoming cheaper and more prevalent, an investment 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 expose oil price movements to 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 remains attractive to investors.