Material Matters: Rollercoaster Oil & Top Picks

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This story features SANTOS LIMITED, and other companies.
For more info SHARE ANALYSIS: STO
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Despite an overnight retracement following a sharp spike, energy markets remain on edge with implications for the global economy.

-Recent developments impacting the oil price
-Markets underestimating systemic risk, says Jarden
-How high can oil and LNG go?
-Which ASX-listed oil exposures benefit most?
-Updated energy pricing forecasts

By Mark Woodruff

What happened between Friday morning and Monday afternoon has instantaneously become part of financial market’s legendary tales, the kind seasoned traders will tell their grand kids long after retirement:

I was there. Saw it with my own two eyes.

Hell, they might have even made money out of it (or not).

On Friday morning, Brent oil futures changed hands around US83/bbl. By Monday afternoon, Sydney time, those futures rallied to US$119.50/bbl. Within a flash they were back at US$86/bbl.

Investors had woken to reports G7 nations were planning a call to discuss releasing strategic oil reserves to offset potential supply disruptions.

US President Donald Trump and Secretary of State Marco Rubio said Washington had a clear plan in place, with Trump later suggesting the conflict, otherwise known as war in Iran, could end sooner than previously expected.

Indicating the timeline may be shorter than the earlier four-to-five-week guidance, the President added Iran may be running low on missiles and vessels were beginning to move more freely through the Strait of Hormuz.

Having reached a low of US$83.66, Brent crude is trading around US$89.00 at the time of writing.

In between, global equity markets followed the lead, first down sharply, as oil pricing surged, then a strong recovery rally on the back of the sharp fall in price.

Markets underestimating systemic risk to global energy stabilty

Given disruption in the Strait of Hormuz from the US/Israel–Iran conflict effectively strips around -20% of global oil and LNG supply from the market immediately, energy sector analysts at Jarden made the call equity markets were dangerously underestimating the systemic risk to global energy stability.

With traffic through the world’s most critical energy chokepoint collapsing toward zero, investors were at risk of interpreting a profound supply shock as a temporary delay.

All that changed on Monday, see above, when the US administration and G7 leaders stepped up to calm a market that had, finally, grasped the seriousness of the emerging situation.

So why the muted market reaction up until Friday? Jarden suspects a general “boy who cried wolf” mindset, after years of Middle Eastern false alarms.

In addition, high inventories in China and Japan, coupled with optimistic US rhetoric about the war being “ahead of schedule”, might also have temporarily cushioned sentiment.

As we all found out yesterday, Jarden’s warning proved prescient, with global gas prices surging after the closure of the Strait of Hormuz constrained around -21% of global LNG supply and QatarEnergy halted production at its 77mtpa Ras Laffan hub.

How high can oil and LNG prices stretch?

Under Jarden’s worst-case scenario, the Strait of Hormuz closes for two months, which would ignite global supply fears and send Brent crude pricing above US$150/bbl.

A more moderate base case assumes a six-to-eight-week conflict, with Strait transit becoming hazardous during the latter half of the period, and the price of Brent averaging around US$90/bbl in 2026.

Under both scenarios, the forecast remains for materially higher spot LNG prices, reflecting the absence of Qatari LNG exports while the Strait remains closed, with prices expected to peak above US$30/mmbtu for LNG.

At the beginning of March, Citi’s base case assumed either a leadership change in Iran or sufficient regime shift to end the conflict within one-to-two weeks, or a US decision to de-escalate after setbacks to Iran’s missile and nuclear capabilities.

Under either of these scenarios, it was estimated oil prices would fall back to around US$70/bbl before gradually easing to about US$62/bbl in the second half of 2026.

Citi also assessed the impact on the Japan Korea Marker (JKM)/Title Transfer Facility (TTF) benchmarks for spot LNG in Asia and European natural gas (quoted in EUR/MWh) in Europe, respectively.

Last week, LNG prices had surged, with JKM moving to more than US$20/mmbtu as incentive pricing attempts to attract cargoes to replace impacted volumes.

If the disruption proves brief, lasting only around two weeks, Citi forecasts JKM and TTF prices will settle around US$14-18/MMBtu or EUR40-50/MWh.  

If the disruption persists longer than expected and markets begin pricing a prolonged outage, it’s thought a three-month closure could lift prices toward US$30/MMBtu, or close to EUR100/MWh.

Very high TTF prices, if realised, would have inflation implications especially for Europe, as seen in 2022, Citi cautioned.

Which ASX oil exposures benefit most?

Broker commentary highlights Santos ((STO)) as the most widely preferred exposure to higher oil prices, with all of Macquarie, Citi and UBS favouring the stock.

Yesterday, Macquarie raised its price assumptions based on current market pricing, stating its preference for Outperform-rated Santos over Woodside Energy ((WDS)) (Neutral) and Underperform-rated Karoon Energy ((KAR)) and Beach Energy ((BPT)).

Under this broker’s research coverage of the sector, Woodside is highlighted as offering most leverage to the JKM price while Karoon is the most leveraged to oil prices.

Citi also rates Santos Buy and Woodside Energy Neutral, though this broker notes Woodside will likely outperform Santos if the conflict escalates and sustained LNG scarcity pushes JKM pricing higher.

While UBS views Woodside (neutral) as having the highest leverage to oil and LNG price movements, Buy-rated Santos is seen offering the greatest upside to fundamental value.

While recognising the surge in oil and LNG prices may prove short-lived, this broker highlighted higher prices provide Woodside and Santos with an unexpected boost to free cash flow, enabling faster deleveraging.

All names in Morgans’ energy producer coverage including the above two, along with Beach Energy, Karoon Energy, and Amplitude Energy ((AEL)) remain in capex-intensive phases, meaning a sustained lift in oil prices would materially improve balance sheet flexibility, dividend sustainability and growth optionality around unsanctioned projects.

This broker favoured Woodside and Amplitude, highlighting their operational and strategic investment case has not changed.

Noting a prolonged disruption could push prices above the US$90-100/bbl range, Morgans applied an oil shock premium of 10% to its 12-month target prices for Woodside, Santos, and Karoon Energy. The premium added for Beach Energy was 5% given oil’s rise could potentially close the mergers and acquisitions market.

The binary nature of current geopolitical risks was noted, and investors were advised to take partial opportunistic profits across the energy sector (as things are likely to become ultra-volatile aty times, as also proven on Monday and today).

Crystallising recent windfall gains while retaining some exposure allows participation in further upside, pointed out Morgans, noting the next 10% move could be in either direction depending on developments.

Morgans advised against chasing the rally. Portfolios with underweight energy exposure may instead look to add selectively on any pullback towards pre-conflict levels (Woodside around $27.00 and Santos around $6.40), where risk-reward would again appear more attractive relative to existing valuations.

For longer-term investors, this broker suggested only modest trimming. The operational and strategic case for Woodside and Santos remains intact, while conflict-driven pricing upside provides justification to hold through volatility.

Morgans also noted Australian LNG producers remain predominantly exposed to oil pricing through oil-linked offtake contracts.

With most energy producers currently in capex-intensive phases, it’s felt a sustained lift in oil prices will materially strengthen balance sheet flexibility, support dividends and enhance optionality around unsanctioned projects.

Beyond the immediate price spike, Jarden assessed Woodside, Santos and Karoon Energy could benefit from a geopolitical tailwind as buyers seek to diversify supply away from Middle Eastern volatility.

Upgraded energy pricing forecasts

UBS raised its 1Q26 Brent forecast to US$71/bbl, implying around US$80/bbl in March, and lifted its 2026 average by US$10/bbl to US$72/bbl. The revision assumes the conflict persists for several weeks, with flows through the Strait of Hormuz severely disrupted amid continued attacks on Gulf countries, though not on critical oil or LNG infrastructure.

UBS suggested further or more damaging strikes on Gulf energy infrastructure could push Brent above US$90/bbl, while a meaningful de-escalation could quickly unwind the current risk premium.

Similarly, Morgans noted if the disruption persists for several weeks, Brent prices of US$90–100/bbl appear plausible as Asian importers scramble for non-Gulf barrels.

Should Iranian or Gulf-state oil infrastructure suffer significant damage, implying extended supply loss, prices of US$100–120/bbl could become the central case, the analyst cautioned.

****

Virtually all brokers monitored daily by FNArena have been increasing their energy pricing forecasts in March, with positive flow-on effects for individual, ASX-listed companies. Depending on further developments, this might not be the end of this trend just yet.

Paid subscribers can keep a close eye on ongoing changes and updates via The Australian Broker Call Report and Stock Analysis on the FNArena website.

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