Oil Prices Tumbled Nearly 20% in May (The Biggest Drop Since 2020). Is it Time to Sell Your Oil Stocks?

Oil prices cooled off considerably in May. Brent oil, the global benchmark price, slumped nearly 20%, its biggest monthly decline since 2020. Crude prices fell amid optimism that the U.S. and Iran were closing in on a peace deal that would include a full reopening of the Strait of Hormuz.

Here's a look at whether last month's slump in crude prices is a signal to sell your oil stocks.

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The current pricing doesn't reflect the physical reality

Oil prices ended last month down around $90 a barrel. Brent closed at $92.05 a barrel while WTI, the primary U.S. oil price benchmark, closed down 17% at $87.36 a barrel. That snapped a four-month surge in crude prices that peaked near $120 a barrel at one point early in the war.

The sell-off in crude prices accelerated in the last week of May on growing optimism that the U.S. and Iran were close to reaching an agreement to end the war. The proposed terms included a stipulation that Iran would fully reopen the Strait of Hormuz within 30 days, allowing the free flow of oil and liquefied natural gas out of the Persian Gulf.

However, the optimism-driven decline in oil prices last month doesn't reflect the reality on the ground. The global economy has been burning through its oil stockpiles to bridge the supply demand gap. Global oil consumption is nearly 9 million barrels per day above current supply levels, causing inventories to fall about 2% below their five-year average at this time of year. As a result, inventory levels are approaching critical levels, prompting executives at ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to warn that oil prices could skyrocket in the coming weeks.

Growing risks

While optimism grew last month, pessimism has returned in early June. According to a Wall Street Journal report on June 1, Iran has halted peace talks with the U.S. due to Israel's continued strikes in Lebanon. That caused crude prices to spike.

Oil could continue rising if the sides don't reach a peace deal soon or the U.S. doesn't reopen the Strait by force. Military action isn't without risk. It increases the likelihood of Iran retaliating with additional attacks against energy infrastructure in the Persian Gulf that could cause damage requiring lengthy repairs.

A favorable risk-reward scenario

The upside risks to crude prices far outweigh the downside risks these days. Even if there's a peace deal, it will be months before oil supplies through the Persian Gulf return to their pre-war level. That's due to the time needed to restart oil wells shut off during the war. As a result, oil prices will likely remain elevated through the end of this year and possibly into early 2027.

That bodes well for oil stocks as they'll generate significantly more cash than they initially expected this year. For example, Chevron anticipated producing an additional $12.5 billion in free cash flow in 2026, assuming oil averaged $70 a barrel. Drivers included recently completed expansion projects, its acquisition of Hess, and its cost-savings initiatives. Chevron is now on track to exceed that target by a significant amount. Despite the surge in crude prices, Chevron stock has risen only about 20% this year.

ExxonMobil stock is also only up about 20% this year, even though crude prices have jumped more than 60%. The oil giant has been steadily improving profitability by delivering significant structural cost savings ($15.6 billion in cumulative savings since 2019) and by investing in its advantaged assets (the highest-return, highest-margin assets). This dual strategy has Exxon on track to produce $145 billion in cumulative surplus cash through 2030 at $65 oil. Exxon is now on track to vastly exceed that target.

Now's the time to buy, not sell

Given the likelihood that oil prices will remain high for the rest of the year, with the potential to surge in the coming weeks if the Strait doesn't reopen, now's the time to buy oil stocks, not sell them. Exxon and Chevron are two great oil stocks to consider, given their ability to continue growing even if oil prices drop.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.