Why Oil Stocks Are Worth a Bet in 2026

A Devon Energy oil pump in the Permian Basin: Its stock is up 16% this year, boosted by cost discipline and savvy M&A. (Courtesy Devon Energy)

Oil prices are already reflecting loads of bad news—and oil stocks have lagged behind the market. Buying them now makes sense in the face of some tailwinds that could commence soon.

For oil, everything that could go wrong has gone wrong. Overproduction has been an issue, with both U.S. producers and OPEC+ nations drilling more than the economy could handle. At the same time, China has boosted its strategic reserves, suggesting weaker demand. A slowing U.S. jobs market has also forced investors to question the demand side of the equation despite consistently higher gross-domestic-product growth. WTI Crude, the U.S. benchmark, has dropped 19% this year to a recent $58. Strategists at Bank of America forecast oil to trade around an average of $60 in 2026, down from $69 in 2025.

You wouldn’t know it from looking at oil stocks. The State Street Energy Sector SPDR exchange-traded fund has gained 8.5% in 2025, including reinvested dividends, less than the S&P 500’s 19% rise but surprisingly solid given crude’s decline. Some of that strength was due to Exxon Mobil , which makes up 24% of the portfolio and returned 17% this past year, while refiners like Phillips 66 , Valero Energy , and Marathon Petroleum also provided a boost.

This coming year might even be better. For one, oil prices might not fall much more. Despite recent negative headlines, oil futures continue to find a floor at around $55, a level hit last April and this month. It could be a sign the market expects the oil picture to improve—countries won’t add supply forever and demand could easily brighten—or at least not get any worse. Federal Reserve interest-rate cuts, if they materialize, could also provide a boost, especially if they cause the economy to overheat.

“It’s such a lower bar for oil next year for any type of upside,” says Adam Turnquist, chief technical strategist at LPL Financial, who expects stronger economic growth to be a catalyst for oil.

He’s not alone. Truist Chief Investment Officer Keith Lerner is sticking by his December upgrade of S&P 500 energy stocks. “We’re at a point where even a little bit of good news could go a long way,” he says.

But the fact that oil stocks have done so well in a rough environment could also be a sign that the sector’s makeover is working. No longer simply a bet on the direction of oil prices, the companies now have the balance sheets and free cash flow to buy back shares and grow their dividends, helping investors earn an acceptable total return.

Devon Energy is one example. Its stock is up 16% this year, boosted by cost discipline and savvy M&A. The company also pays a 2.8% dividend, with payments expected to hit $608 million in 2025, or about 20% of free cash flow. That dividend looks set to grow. Management has guided for capital spending to drop by $90 million, to $3.6 billion, next year, which should help its free cash flow rise to the $3.13 billion Wall Street expects and let management keep its promise, made on its most-recent earnings call, to grow the dividend.

It’s proof that energy stocks aren’t just about oil prices anymore—and worth a bet in 2026.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com