Nobody wants to buy oil stocks at the moment. Crude prices are falling, inventory levels are high, and production has rebounded from its lows in key areas.
None of this is particularly positive for the likes of Shell and BP. But the time to think about buying shares in cyclical businesses is when things look tough.
Oil outlook
Oil prices have been falling recently and the outlook for 2026 isn’t strong. Producers are going to have to deal with challenges on both the demand side and the supply side.
Source: Trading Economics
On the demand side, global growth is slowing. On top of this, high inventory levels and the transition to renewables – especially in China – create ongoing challenges.
In terms of supply, there are also big challenges. Oil production is high at the moment and this is being driven by higher output from the US, Guyana, Brazil, and Canada.
All of this makes a significant challenge for 2026. But investing is about looking past the next 12 months and I think there are clear reasons for optimism going forward.
Time to strike?
The outlook for 2026 isn’t positive. But it’s times like these when shares in oil companies typically trade at their lowest levels and things can change quickly.
Increasing geopolitical tensions, weakness in the US dollar, and lower interest rates can cause prices to rise rapidly. And there are also structural reasons for optimism.
Low oil prices tend to attract low investment levels from producers. There’s not much incentive to drill new wells or extend existing ones if the returns are likely to be weak.
When this happens, supply tends to fall away naturally as existing wells become less productive. And that tends to cause prices to recover over time.
A stock to consider
My top oil stock is Chord Energy (NASDAQ:CHRD) – a US company with operations in the Williston Basin. What sets it apart, in my view, is its capital allocation policy.
The firm doesn’t really engage in speculative drilling projects. Instead, it looks to expand via strategic acquisitions and use its cash for dividends and share buybacks.
Chord doesn’t publish an official break-even costs per barrel, but analysts estimate this to be somewhere between $40 and $45. That’s well below the current $56 price level.
That means the base dividend should be relatively resilient even if oil prices stay low in 2026. And with the stock having fallen recently, that’s a 5.8% yield at today’s prices.
Cyclical investing
Chord’s operations being focused in one area creates a certain risk. It means regulatory changes in North Dakota could have an outside effect on the overall company.
My own view, though, is that this is preferable to the windfall taxes the likes of BP and Shell are currently facing. And I also think prices are set to hit cyclical lows in 2026.
That’s why Chord is on my buy list heading into 2026. The time to be greedy is when others are fearful and it looks to me as though this is clearly the case right now.
