Oil vs. energy stocks: Should you own the commodity or the company?

Oil prices have rallied with a ferocity that surpasses Russia's invasion of Ukraine and is starting to look comparable to the Gulf War, where prices almost doubled after Iraq invaded Kuwait.

Since 27 February, Brent has rallied ~46% to over US$100 a barrel, the highest since June 2022. Over the same time period, the S&P/ASX 200 Energy Index has gained 18% to trade at the highest since February 2024.

The question facing Australian investors is whether to play this through direct commodity exposure, such as the BetaShares Crude Oil Index ETF (ASX: OOO), or through ASX-listed energy names like Woodside or Santos.

A quick recap

Before we dive in, here’s a recap of some of the key numbers regarding the Iran conflict.

• The Strait of Hormuz normally carries roughly 20 million barrels per day of crude oil, about one-fifth of global supply, and approximately 20% of global LNG trade.
• The IEA projected global oil supply would plunge by 8 million barrels per day in March, with Gulf countries cutting total oil production by at least 10 million barrels per day as storage neared capacity and export routes remained blocked.
• Qatar's Ras Laffan, the world's largest LNG production facility with roughly 77 million tonnes per annum of capacity (about 20% of global LNG supply), was hit by Iranian missile strikes. Two of its 14 liquefaction trains were damaged, reducing LNG capacity by 17%.
• Saudi Aramco's Ras Tanura refinery and crude export terminal shut down. More than 3 million barrels per day of refining capacity across the region has been taken offline.

Goldman Sachs has flagged this as the largest oil supply shock on record.

Why aren't my oil stocks going up?

Oil prices have far outperformed energy-related equities. It's probably one of the most frustrating dynamics for investors, watching the price of the underlying commodity leave the companies that actually produce or refine it behind. 

The core reason is that commodity equities are priced on discounted future cash flows, not today's spot price. That creates a persistent disconnect that trips up many investors.

• Spot vs. futures curve: Stock valuations reflect all future production, not just today's price. When markets are in deep backwardation (spot well above futures), only a small slice of output is sold at elevated spot prices, limiting the earnings uplift investors might expect.
• Production uncertainty: Variable yields, operating conditions and financing cycles make forward production deeply uncertain, meaning producers often can't or won't fully hedge, leaving significant unpriced exposure.
• Hedging costs and collateral risk: Selling forward production requires posting margin with exchanges, and companies that do hedge can face margin calls if prices move further against their position. This can get extremely ugly.
• Equity risk premium: Commodity stocks are still equities and re-price alongside the broader market as risk appetite shifts.

There are plenty of other nuances, but these are useful reminders as to why your favourite stock doesn't always trade one-to-one with the spot price of its underlying commodity.

What history says about oil prices

History shows a clear pattern when it comes to major geopolitical shocks: prices tend to trend higher for days, if not weeks.

The average pattern shows oil prices climbing a further 20-30% within two months after the initial catalyst. In other words, markets often under-price the first phase of the supply risk. As the physical disruption starts to emerge in flows, refined products and inventories, prices tend to stay elevated for a little longer.

As for equities, I've gathered the performance of Brent vs. the S&P/ASX 200 Energy Index (green), Santos (blue) and Woodside (red) for the above three geopolitical events (excluding the Gulf War).

At a glance, there is a clear reluctance for energy equities to underwrite these geopolitically driven oil price moves.

The case for energy stocks 

After reading all the above, you might conclude that it's best to trade oil or an oil-equivalent exposure like Betashares' Crude Oil ETF. The underlying commodity will absorb the geopolitical risk premium, but the conflict eventually cools and such premiums get priced out. What you need to watch for is whether energy prices re-base at higher levels, because that's when the re-rate for energy equities begins.

Even still, there's no denying energy stocks are trading at attractive valuations as capex begins to roll off and key projects come online.

Let’s take a closer look at Santos

• Santos is up almost 20% since 27-Feb to $7.84
• That’s still below the non-indicative offer it received in mid-2025 of $8.90 per share from the consortium led by ADNOC.
• Santos had a book value of $7.21 per share at the end of FY25.
• Spent approximately US$6 billion on its Barossa (62.5% stake) and Pikka Phase 1 (51% stake) Projects.
• Barossa delivered its first LNG cargos in January and is currently ramping up towards full production of ~19MMboe per annum.
• Pikka Phase 1 is progressing final commissioning with ramp up by mid-2026, this is forecast to add ~12MMboe per annum for Santos.

Despite some of the challenges Santos has had bringing these two growth projects online, it is now entering a period where it has some degree of asset backing (via book value and the ADNOC offer price) and is well positioned for the global LNG shortage.

As Macquarie analysts put it: "Despite the near-term teething issues, STO's major growth projects, Barossa and Pikka, will enter the harvest phase through 1H26. STO's strategic review of its domestic assets now becomes key, and we expect it can unlock value and further simplify the portfolio."

Meanwhile, Woodside guided a 6-14% year-on-year decline in production volumes for 2026 to 172-175MMboe. The company also has various development projects set to come online in the short-to-medium term.

• Scarborough (WA, LNG) was 94% complete at year-end 2025, with its first LNG cargo on track for 4Q26.
• Louisiana LNG (USA) was 2% complete at end-2025, and is targeting first LNG in 2029.
• Triton (Mexico, oil) is an offshore oil development that was 50% complete at end-2025, targeting first oil in 2028.
• Beaumont New Ammonia (Texas) delivered first production in December 2025.

According to Macquarie, Woodside produced US$13.3 profit per barrel in 2025, when oil prices averaged US$68.1 a barrel. The margin expansion at current levels of US$100 a barrel would be substantial, and even after rallying almost 50% year-to-date, the stock would still trade at a mere 6-7x multiple at those prices.

The bottom line

Oil becomes a different beast during geopolitical crises. Spot prices absorb the risk premium quickly, but energy equities tend to lag, and history shows that gap rarely closes in the near term. But if oil prices re-base at structurally higher levels, the outlook for producers like Santos and Woodside, or a broad energy ETF like the Betashares Global Energy Companies ETF (ASX: FUEL) shifts materially higher. 

Most analysts remain reluctant to adjust their models for higher prices. Macquarie, for example, is Neutral rated on Woodside with a $30.00 target price, though its model assumes US$68.95 a barrel in FY26 and US$65.67 for FY27. Should prices stay elevated for longer, some significant revisions are coming.

Investors have long held gold and silver as portfolio hedges, and in recent years, even uranium has entered the mix. But rarely does anyone hold oil. An event like this is a reminder of just how quickly crude can move and the role it can play when geopolitical risk flares up.