The World Is Burning Through Oil With No Resupply in Sight. Is SHEL Stock a Buy Before the Squeeze Gets Worse?

Shell (NYSE: SHEL) CEO Wael Sawan is one of many energy industry executives sounding the alarm on the oil supply/demand imbalance that has been building since the geopolitical conflict in the Middle East erupted. Right now, Sawan says the world is short 1 billion barrels of oil, a number Halliburton (NYSE: HAL) CEO Jeffrey Miller backs.

The CEOs of Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) both agree that it will take months to solve the growing imbalance once the conflict ends. Until then, the supply shortfall will only get worse. Should you buy Shell or one of its rivals? The answer depends on your investment horizon.

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High oil prices are a problem, but they aren't unusual

While the current conflict is headline news, the energy sector has a long history of volatility. Today's high oil prices aren't really unusual. If history is a guide, when the conflict ends and the supply/demand imbalance is finally corrected, oil prices will retreat. Stocks of oil companies tend to rise and fall along with oil prices.

Buying Shell, Chevron, and Exxon will let you participate in the upside. But they are integrated energy giants with portfolios spanning the entire energy value chain. That tends to mute their participation in oil rallies (and routs). If you are trying to ride oil prices higher, a pure-play upstream stock will probably give you more bang for the buck, such as Devon Energy (NYSE: DVN) or Diamondback Energy (NASDAQ: FANG). Both are U.S.-focused, so the conflict in the Middle East isn't slowing down their production. There's just one problem. Upstream producers are also likely to feel the brunt of an oil price drop, as investors exit the oil trade.

The proof is in the dividends for Chevron and Exxon

If you are looking to establish a long-term position in the energy sector right now, your best bet is an integrated energy giant like Shell, Chevron, or Exxon. They have all proven they can survive through the entire energy cycle in relative stride. However, Chevron and Exxon have a leg up on Shell, noting that Shell cut its dividend in 2020. Chevron and Exxon have each increased their dividend for decades.

SHEL Debt to Equity Ratio data by YCharts

Moreover, they have the strongest balance sheets in their peer group. That allows Chevron and Exxon to add debt during energy downturns so they can continue to support their businesses and dividend until energy prices recover. When oil prices are weak, you can focus on collecting reliable dividends instead of worrying about what are likely to be falling stock prices. Right now, Chevron's 3.9% yield is the highest of this trio, with Exxon at 2.8% and Shell at 3.4%.

Shell is OK, but Chevron is more attractive

All in, Chevron is probably the best option among the integrated majors right now for those who take a long-term view in the energy sector. And when oil markets do eventually recover, and oil prices fall, you might even consider adding to your position in this historically reliable dividend stock.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.