The lacustrine shale of the Upper Cretaceous Qingshankou Formation is the principal prospective unconventional target lithology, acting as source, reservoir, and seal. Lithofacies and associated storage capacity are two significant factors in shale oil prospectivity. This paper describes an investigation of the lower Qingshankou Formation lacustrine shale based on detailed description and analysis of cores, shale lithofacies characteristics, depositional setting, and stacking patterns. Seven lithofacies are recognized based on organic matter content, sedimentary structure, and mineralogy, all exhibiting rapid vertical and lateral changes controlled by the depositional setting and basin evolution. An overall trend from shallow-water to deep-water depositional environments is interpreted from the characteristics of the infilling sequences, characterized by increasing total organic carbon (TOC) and total clay content and decreasing layer thickness (i.e., from bedded to laminated then to massive sedimentary structures). Periods of deposition during shallowing cycles show a reverse trend in the sedimentary characteristics described above. The sedimentary rocks in the studied interval show three complete short-term cycles, each one containing progressive and regressive system tracts. Massive siliceous mudstones with both high and moderate TOC are considered to have the best hydrocarbon generation potential. Laminated siliceous mudstones, bedded siltstones, and calcareous mudstones with moderate and low TOC could have the same high hydrocarbon saturations as the high-TOC massive siliceous mudstones, but these lithologies contain more brittle minerals than the massive mudstones. Several siltstone samples show low or zero saturation of in situ hydrocarbons; this is considered to be related to a combination of fair to poor hydrocarbon generation potential and extremely low permeability, limiting migration. Moderate-TOC laminated siliceous mudstones were also observed to have connective pore-fracture networks. It can be demonstrated that successive thick sequences of moderate-TOC laminated siliceous mudstones, showing high volumes of hydrocarbon in situ, a high mineral brittleness index, and good permeability, combine to form shale oil exploration “sweet spots.”