By Avi Salzman

Oil prices are in a rut, and could keep falling. Oil stocks have so far fared better, but the reality of a weak market may eventually catch up to them.

Oil was rising on Wednesday, but has been in a gradual selloff for weeks, dropping about 20% for the year. A glut of crude has been building around the world for months, and is now too big to ignore.

The Organization of the Petroleum Exporting Countries and allies like Russia have boosted their production by over two million barrels a day, unwinding production cuts they began when Covid-19 caused oil demand to fall. Production has also increased in other countries, including Guyana and Brazil. But global demand has been tepid, rising by less than one million barrels a day from last year, according to JPMorgan.

The International Energy Agency said this month that the oil market has already been oversupplied by about 1.9 million barrels a day this year -- a significant glut in a 100 million barrel daily market. But the problems are about to escalate. "Surging supplies from the Middle East and the Americas are pointing to an untenable surplus of nearly 4 million barrels per day in 2026, making it increasingly clear that something has to give," the agency said.

Oil futures recently slipped into a trading pattern known as contango, where oil delivered today is worth less than oil delivered several months from now. The December contract for West Texas Intermediate crude, the U.S. benchmark, was up 2.5% on Wednesday to $58.67. The December 2026 contract was trading at $59.17.

Visually, the futures curve looks bullish -- it moves up and to the right, indicating that traders expect things to get better. But contango tends to be bearish. In a contango market, traders have an incentive to buy oil and store it instead of selling it for refining or other economically productive uses.

Some oil stocks are holding up better, however. Exxon Mobil has risen 6.3% this year and Chevron is up 5.6%. They have the benefit of operating in several businesses outside of just oil production, from refining to natural gas processing. More production-focused names have done worse. EOG, for instance, is down 15% this year.

Some analysts have urged investors to be picky in energy as oil sells off. Evercore analyst Stephen Richardson recommended that investors focus on names with special attributes.

He likes energy services company Baker Hughes, for instance, because it also has a large natural gas-focused business. And oil and gas producer ConocoPhillips is in good shape, because it's got a low cost of supply, a large natural gas business, and a steady history of shareholder returns, Richardson writes. Its dividend yield is 3.6%.

"This consistency sets it apart among large-cap peers," he writes. He rates the shares at Outperform with a price target of $111.

Write to Avi Salzman at avi.salzman@barrons.com

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October 22, 2025 12:38 ET (16:38 GMT)

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