Our #1 commodity call for 2026: What’s old is new again!

Analysis of a commodity thematic ultimately boils down to three key questions:

1. Is there a strong and highly inelastic medium to long term demand?
2. How readily can new supply be brought on and are there substitutability risks?
3. Where is the spot pricing trading at relative to the cost of production and how long can demand be met from existing reserves?

As deep value, contrarian investors with a high conviction mandate, Collins St Asset Management favour what is fundamentally robust over what is fashionable.

This approach often leads us to ideas that are at or near the bottom of their cycle, with peak pessimism allowing us to get set in stocks without any meaningful pricing tension by the broader market.

As uncomfortable as this may be in the short term, it is important to recognise that our purchases are forward-looking and are based on the magnitude of the upside we see over our intended holding period. What has happened to the stock price in the past is largely irrelevant, insofar as the catalyst for the decline and its recovery is able to be clearly understood.

Our flagship Collins St Value Fund has established a 10-year track record doing exactly that. Having got set in trades that saw between 3X – 5X re-ratings in commodities such as Uranium in 2017, Gold in 2019 and Gold again in 2023, we believe we have found another extremely asymmetric opportunity at an attractive point. We have allocated approximately 20% of the Collins St Value Fund into it.

For 2026 we are backing traditional energy.
Oil is our #1 pick for the year ahead. 

Demand for oil is at a record high and is forecast to increase

2025 saw a record level of global demand for oil with the US Energy Information Administration (“EIA”) estimating daily global consumption of approximately 103.7 million barrels.1 The Organisation for the Petroleum Exporting Countries (“OPEC”) estimate that annual consumption could grow by as much as 1.4 million barrels per day throughout 20262 and up almost another 20% again to 120 million barrels per day by 2050.3

Yet at the same time, demand for oil has been increasing, the price of oil has been decreasing, as shown in the graph below (2019 – 2025):

Interestingly, the 2025 estimated global crude demand figures may be masking the true extent of consumption for that year, as some reporting bodies, such as the International Energy Agency (“IEA”) have, over recent years, been upgrading their global oil consumption figures at the end of each year after reconciling actual inventory changes with their published forecast figures.

It is also important to note that whilst the rate at which global demand for oil has slowed relative to historic boom periods, the trend is still strongly upwards, and the disconnect between price and demand is extreme.

Medium-term demand for oil clearly remains robust, with alternative sources of supply such as renewables, supported by accommodative policy settings domestically and abroad5 unlikely to provide the ‘silver bullet’ that permanently disrupts the traditional energy value chain over the medium term.

Whilst the use of renewable energy, driven predominantly by solar power, is expected to nearly double between 2025 and 2030,6 we believe the investment thesis for oil remains intact. This is because we believe the drivers of global oil demand are diverse (motor fuel, aviation fuel, manufacturing, chemical feedstock), entrenched (existing combustion engines and manufacturing processes take time to re-engineer and the reliability of oil is difficult to match via environmentally driven alternatives), and are presently a net positive contributor to public sector balance sheets (not requiring subsidisation and readily taxable via existing legal structures).

The IEA evidence the diversity of global oil demand dynamics in their 2025 Global Energy Review where they note that decreases in some markets (such as motor fuel in response to the uptake in electrical vehicles) are being more than offset by growth in others (such as aviation fuel or chemical feedstock).7

To expand upon the growth in aviation fuel as one example, it is noteworthy that In Australia alone, the CSIRO project that the demand for aviation fuel will increase by 75% between 2023 – 20508 and that the higher density fuel requirements of long distance travel (both internal and external to Australia) entrench incumbent aviation fuel sources over Sustainable Aviation Fuels (“SAFs”) for many years to come.

Short-term supply surpluses will give way to a supply-side price squeeze

Recent analysis from a variety of reporting agencies, such as the IEA project surplus oil production of up to four million barrels per day throughout 2026.9 All things being equal, this would have the potential to see depressed oil prices for the foreseeable future, as excess supply is sold into a declining spot price and stock piles are built around the world – a trend that has somewhat accelerated in recent times due to a combination of a low spot price of oil and geo-political tensions placing a renewed emphasis on national energy security initiatives.

An example of such security initiatives is China (importers of over 70% of their oil consumption each year)10 who enacted new energy laws in 2025 that mandate the accumulation of national reserves at a rate greater than what the Government can practically store – the outworking of which requires private companies to store oil on behalf of the Government until new facilities can be built, and also that the ability of China to capitalise on a lower oil price is somewhat restricted by their ability to store the oil.11

Other large developing economies, such as India, also have a high dependency on foreign oil, with over 80% of annual consumption sourced from abroad12 and have been increasing their stockpiles accordingly.13 They are similarly constrained by their ability to store that oil, with some estimates suggesting India has only 74 days’ worth of oil in reserve based on their existing infrastructure.14

The ‘fast-moving’ nature of oil is an important point, as we believe that stockpiles are likely to be reduced quickly and that the market will move into an equilibrium position for a period of time before supply becomes squeezed in response to historically disincentivised new supply and prices re-rate upward in response.

With respect to existing shale sources of supply, which have historically been able to be ramped up quickly, we have seen Tier 1 and 2 locations in the US Permian basin experience falls in production of more than 15% per lateral foot in recent times. We believe this implies the resources are being exhausted, and that the shale growth engine of the past decade has peaked and is moving into decline as a result of project cost and productivity headwinds.15

Consequently, with the primary non-OPEC source of growth (shale) in decline, the world effectively loses its main flexible supply shock absorber; thus, in our view, increasing the probability that any demand surprise or production outage translates into disproportionate upward movements in the spot price of oil.

Save for a resolution to the Russia/Ukraine conflict that sees large volumes of Russian oil being reintroduced to the market, there are few remaining alternatives.

Global spot pricing of oil and the complication of new supply

The spot price of crude oil is presently in the USD$55 - $60 per barrel range, beneath our estimated average cost of production of US$60 a barrel.16

Each time we have seen this anomaly occur with a commodity in the past, we have focused our research on three key questions:

• Over the medium to long term is there a supply surplus, equilibrium or deficit forecast?
• How static is the average cost of production over time?
• How will new supply be incentivised?

With respect to the first question, leading global consultancy firm Wood Mackenzie echo the forecast of OPEC (albeit with different timeframes in mind) and estimate that:

…the ‘supply’ gap by 2035 – the volume of new liquids the upstream industry needs to bring onstream – is just over 20 million b/d for base case demand….17

Wood Mackenzie further submit that:

Achieving that will require sustained development investment of at least US$520 billion a year.18

At a fundamental level, we have observed that equity and project oil sector valuations in the market are effectively pricing the long-dated “Net Present Value fat tail” at close to zero, assuming peak demand in the present and ignoring the large cash flows that can still accrue for 9–10 years and beyond, despite global demand being forecast to continue increasing throughout this period.

Free cash flow per barrel estimates for the mid to large cap Australian production stocks are, at current levels, somewhere between break-even to around USD$18 per barrel and, with current market valuations reflecting less than a 10X multiple on our assessment of their forward earnings, a sharp upward re-rating in the share price in response to a high leverage to an increase in the spot price of oil is a real possibility.

These macro and market-specific dynamics have led us to establish a ~20% weighting to ASX-listed oil development/production companies within the flagship Collins St Value Fund and represent our highest conviction commodity call for 2026.

We have seen commodity cycles turn sharply in the past. We have invested in established companies with strong balance sheets and known asset reserves. We have paid less than 10X forward earnings to get set in what we believe to be a resurgence in the most widely used and traded commodity on the planet and look forward to watching the thematic play out over time.