Prediction: Oil Is Heading to $60 a Barrel by 2027, and These Stocks Are Worth Buying Now

Oil prices doubled at one point this year due to the closure of the Strait of Hormuz, surging from around $60 to almost $120. However, crude has given back most of those gains, falling into the $70s, as the U.S. and Iran have agreed to a deal to reopen that key energy waterway.

While the oil market has a long road to recovery, I expect oil will hit $60 a barrel at some point next year. Here's why and the oil stocks to buy under this scenario.

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From a supply shortage to a glut

Iran's moves to close the Strait of Hormuz created a massive oil supply disruption. The International Energy Agency (IEA) estimates that it blocked more than 14 million barrels per day (BPD) from the market, over 10% of global demand.

However, the IEA anticipates that the oil market will shift from a supply shortfall to a glut by 2027. Global oil supplies are on track to surge by 8 million BPD next year, while demand will only rise by around 2 million BPD. That's due to a return of shut-in supplies in the Middle East, as well as higher output from Iran, the UAE, and Venezuela. As a result, the IEA expects supply to outpace demand by more than 5 million BPD next year, down from a nearly 1 million BPD shortfall this year.

This excess supply will help the industry rebuild oil inventory levels, which have plunged as they bridged the gap this year. However, as storage levels rebuild, oil prices will likely start falling toward $60.

These oil stocks don't really care about crude prices

Falling oil prices will hurt oil producers, who will earn far less at $60 a barrel than they did at twice that level. However, it won't affect oil pipeline stocks. That's because they're paid fixed fees based on the volumes flowing through their midstream systems.

Enbridge (NYSE: ENB) operates North America's longest and most complex crude oil and liquids pipeline system at more than 18,000 miles. It transports 30% of the oil produced on the continent. About 99% of its liquids pipeline earnings come from regulated rate structures or take-or-pay contracts, providing it with very predictable cash flow. Enbridge's cash flow is so predictable that it has achieved its annual financial guidance for 20 straight years, which includes two notable oil market downturns. It has also increased its dividend for 31 consecutive years (in Canadian dollars). The pipeline company has a multi-year backlog of commercially secured expansion projects to support growing energy demand, which should grow its cash flow per share by around 5% annually starting in 2027. With a more than 5% current dividend yield and 5% annual earnings growth ahead, Enbridge can generate double-digit total operational returns (income yield plus earnings growth rate) regardless of what oil averages next year.

Plains All American Pipeline (NASDAQ: PAA) is a master limited partnership (an entity that sends a Schedule K-1 Federal Tax form each year) focused on operating oil pipelines and related infrastructure. It owns over 20,000 miles of pipelines and has about 118 million barrels of liquids storage capacity. Roughly 85% of its earnings come from fee-based contracts, limiting the impact of oil price volatility on its cash flows. Plains All American Pipeline expects rising global oil demand to drive mid-single-digit earnings growth over the long term. That should give the oil pipeline company more fuel to increase its high-yielding distribution (nearly 8% current yield). That high-yielding payout will provide a solid base return in any oil price environment.

Oil pipelines will be just fine at $60 oil

The oil market will shift from a severe shortage to a major supply glut over the coming year. That will likely put further downward pressure on crude prices, which I predict will hit $60 a barrel by 2027. While that will negatively affect oil producers, it won't impact oil pipeline operators such as Enbridge and Plains All American Pipeline. That makes those oil stocks worth buying now, as they'll provide investors with income and steady returns even as oil prices continue to cool.

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