Energy Sector Under Pressure: Oil Price Weakness Tests ASX Producers

Oil prices are testing local energy stocks as crude trades near six-month lows, raising questions about dividend sustainability at Australia's major producers. With WTI hovering around the $61 mark and analysts forecasting potential weakness through early 2026, investors are reassessing whether Santos and Woodside can maintain their attractive yields.

The oil market is sending mixed signals. Prices have declined despite ongoing geopolitical tensions, suggesting deeper structural issues around supply and demand that could persist for months.

OPEC's Balancing Act Creates Uncertainty

OPEC+ has decided to slightly increase oil production in December, then stop any further increases until at least April 2026. They’re trying to avoid flooding the market with too much oil, but this cautious move hasn’t helped prices much.

Here’s the problem: in 2025, oil supply is expected to grow by 2.7 million barrels per day, while demand will only grow by 1.1 million barrels per day. That means extra oil could pile up, which usually pushes prices down.

Analysts forecast WTI could average around $62 by late 2025, with downside risk toward $52 in early 2026 if oversupply persists. These prices aren’t disastrous, but they’re lower than what many oil companies were hoping for when planning their budgets. OPEC+ is also trying to win back market share from competitors like U.S. shale producers. To do that, they’ve actually increased production this year. But if every producer pumps more oil to stay competitive, it can hurt everyone by driving prices down, a classic lose-lose situation.

What this means for investors: Oil prices may stay weak for a while. Keep an eye on supply levels, U.S. production, and any changes in OPEC+ strategy. These will affect energy stocks, dividends, and future investment plans.

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Can Producers Stay Profitable at $60 Oil?

When oil was above $70 a barrel, most producers made good profits. But now, with prices closer to $60, costs are under the spotlight. In the U.S. Permian Basin, new wells need around $62–64 per barrel to break even. That’s very close to current prices, so less efficient wells may not be worth drilling. Australian producers are in a slightly better position. Many operate older fields with lower running costs. But once you include spending on equipment and debt, they still need decent prices to stay profitable. Most oil companies now face break-even costs above current prices, meaning they may lose money or need to cut costs if prices stay low.

The market is sorting out which producers can survive at $60 oil, and which ones were built for $75. This shakeout tends to speed up when prices fall.

What This Means for Santos and Woodside

Australia’s two largest energy producers, Santos and Woodside, are feeling the pressure of falling oil prices, but each is responding differently based on their assets, cash flow, and dividend strategies.

Santos (ASX: STO)

• Dividend yield: Around 8.5%, based on recent share price and October 2025 payout.
• Cash payout ratio: Estimated above 100%, indicating dividends exceed operating cash flow — a short-term risk if oil prices stay low.
• Future plans: From 2026, Santos aims to return 60–100% of free cash flow to shareholders, depending on its debt levels.
• Key dependency: These plans rely on stronger oil prices and the successful delivery of the Barossa LNG project.
• Investor watchpoint: High payout and project reliance make Santos more exposed if crude prices remain weak.

Woodside (ASX: WDS)

• Dividend yield: Around 8.1%, with a 68.4% payout ratio, still within its target range.
• Revenue support: The Sangomar field generated nearly $1 billion in the first half of 2025, helping cushion the impact of softer oil prices.
• LNG exposure: Woodside’s strong LNG portfolio provides more stable cash flow, making it less sensitive to oil price swings.
• Financial strength: Diversified assets and disciplined capital management offer resilience in a downturn.

Both companies benefit from LNG, which is typically less volatile than oil. However, if crude prices stay low for an extended period, it could affect their earnings and ability to maintain dividends. Investors should monitor project execution, gearing levels, and commodity trends to assess long-term sustainability.

The Income Investor’s Dilemma

High dividend yields from ASX energy stocks like Santos (ASX: STO) and Woodside (ASX: WDS) may look appealing, but sustainability is key. Both companies can pay dividends now, but the real test is whether they can maintain or grow those payouts if oil averages $55–60 through 2026, instead of rebounding to $70–75.

While both have strong operations and diversified portfolios, they’re still exposed to commodity cycles. Investors should closely monitor the free cash flow coverage of dividends in quarterly results.

Looking Ahead

Weak oil prices create both risk and opportunity. Stronger producers may consolidate or acquire assets, while others may need to cut spending or dividends. The energy transition continues, but lower oil prices could slow its pace.

For now, ASX energy stocks are under pressure. Investors must weigh current yields against long-term price risks and assess which companies can stay resilient in a lower-price environment.

 

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