ASX Energy Stocks Rally as OPEC Pauses Output: Santos and Karoon in Focus

ASX energy stocks gained ground this week after OPEC+ paused production increases for early 2026, a decision that could finally stabilise oil prices after a challenging year. The group will add just 137,000 barrels daily in December, then freeze output from January through March. That may sound like technical supply management, but what it means for investors is simple: less oil hitting the market during weak seasonal demand should prevent the oversupply that’s been crushing prices.

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Oil Price Stability Offers Hope for ASX Energy Stocks

This is important because the energy sector had a rough year in 2024; it was the worst performer on the ASX, dropping around 21%. The main reasons were falling oil prices and weaker demand, especially due to China’s economic slowdown. Now, with WTI crude holding steady around US$61 per barrel and Brent near US$65, there’s a sign that prices may have found a bottom. OPEC’s decision to limit supply could help stop further price drops, which gives struggling energy stocks, like Santos and Karoon, a better chance to recover in the months ahead.

Santos Positioned for LNG Growth as Cash Flow Supports Dividends

Santos (ASX: STO) offers investors exposure to liquefied natural gas at a time when countries are shifting away from coal. The company’s long-term LNG contracts provide revenue stability that pure oil producers lack, smoothing out the volatility that’s plagued the sector.

What’s working for Santos:

-Papua New Guinea LNG ramping up: New production volumes coming online, boosting output without major new capital spending

-US$1.9 billion annual free cash flow: Santos reported US$1.9 billion in free cash flow over the past year, supporting growth and dividends with a solid financial runway

-Strong dividend yield: Currently above 5%, attractive for income investors even without price appreciation

The stock recently gained 2.2% but remains well off its highs, down roughly 8% over the past year. If oil stabilises in the $60-$65 range, Santos’ diversified production base and LNG contracts position it to outperform purely oil-focused peers.

Karoon Delivers Record Output While Expanding Capacity

Karoon Energy (ASX: KAR) surged 9.8% recently after reporting record production of 5.3 million barrels, up from around 4 million barrels in prior periods. What this means is the company is successfully executing its growth plan while competitors struggle with declining output.

Why Karoon stands out:

-Baúna field in Brazil: 100% owned, providing full control and exposure to growing Latin American energy demand

-US Gulf of Mexico assets: Who Dat fields offer geographic diversification and North American pricing exposure

-Field expansion underway: Baúna development should unlock additional production over the next two years, supporting volume growth of 15-20%

Karoon trades at a P/E of around 6x, well below the sector average of 13x; it appears cheap relative to its production growth trajectory. The risk is oil prices falling below $55 per barrel, which would pressure margins despite strong volumes.

Investors Takeaway

Energy stocks aren’t out of the woods yet, but OPEC’s production pause removes a major overhang. The key risk remains execution; if OPEC members cheat on quotas or China’s demand weakens further, oil could test $55 per barrel, pressuring all producers.
For investors willing to accept volatility, Santos offers stability through LNG contracts while Karoon provides pure production growth exposure. Both trade at reasonable valuations with dividend yields exceeding 5%, making them worth watching if oil holds current levels. Investors seeking income may favour Santos, while those targeting growth could consider Karoon.