The article below is an excerpt from our Q2 2025 commentary.
The world has decided it does not like oil. One would be hard-pressed to find another commodity so roundly scorned, so dismissed as a relic of another age. And yet, history suggests that such moments of universal disdain are precisely the moments when fortunes are made. We believe oil could well be the best-performing commodity of the next five years, perhaps of the decade.
The choreography of a bear market is familiar. Prices fall, an explanation takes hold, and the explanation hardens into doctrine. Each new downtick becomes evidence that the story was right all along. Investors huddle together in certainty, never noticing that the ground beneath them has begun to shift. The narrative, convincing at first blush, eventually blinds its believers. And when the fundamentals quietly reassert themselves, the crowd is left bewildered, caught on the wrong side of the trade.
Twenty-five years ago, the pariah of the financial world was not oil but gold. Nixon had slammed shut the Treasury’s gold window in 1971, breaking the dollar’s last tie to bullion and ushering in the age of pure paper money. Inflation raged through the decade, and no one knew whether the experiment would hold. Then came Paul Volcker, raising short-term rates to levels that nearly scorched the earth — 20 percent. Inflation broke, financial assets soared, and gold was left standing in the corner like an embarrassed guest at its own party.
Through the mid and late 1990s, central banks hurried to unload what now seemed to be useless yellow metal bricks, trading them for bonds that actually paid interest. Near panic selling gripped gold markets as central bankers rushed for the exits. Disorder escalated and in September 1999 the US Treasury ordered central bankers to convene in Washington, forcing them to sign the “Washington Agreement”— in retrospect, a gentleman’s pact determining how much the of the “barbaric relic” could be sold without embarrassing one another. Andy Smith, in his widely-read “Precious Thoughts” column, explained with authority why gold was a relic of the past. And the market agreed: from 1980 to 1999, the price collapsed by 70%, finally bottoming at $252 an ounce, just before the British and Swiss made their last, humiliating disposals. An ounce of gold bought only seven barrels of oil multiple times between 2000 and 2003, the lowest ratio ever recorded. It was, in hindsight, absurdly cheap. I was one of the few stubborn optimists left, telling Forbes in 2000 that gold would be the best-performing asset of the decade. The irony, of course, is that not only was that prediction borne out, but gold has turned out to be the best performer of the last quarter-century. Central banks, once the great sellers, are now the great buyers — especially in the emerging world.
Today the unwanted house guest is oil. To most investors it is a museum piece, a sooty relic of the industrial age, bound to be replaced by the clean inevitability of electricity. The numbers tell the story of its disgrace: crude peaked at $145 a barrel in the summer of 2008, amid the frenzy of a short squeeze, and since has endured a grinding seventeen-year bear market. Including a first in commodity history: on April 2020, in the COVID inspired panic, a barrel of oil traded at minus $40 barrel on the NYMEX futures exchange. Oil prices today, still sit 60% below their 2008 peak. Energy’s share of the S&P 500 has withered from 14 percent in 2011 to under 3 percent. This spring, a single ounce of gold bought fifty-seven barrels of oil — a record exchange, save for that surreal moment in 2020 when oil briefly went negative.
In 1999, it was gold that was mispriced, crushed by a narrative that proved incorrect. For the next 12 years gold—and let’s not forget gold shares-- were by far the best performing asset class. In September 1999 an ounce of gold bought less 7 barrels of oil, that same gold ounce back in April bought 57 barrels—over 8 times more.
The mispricing of oil today is as extreme as gold’s mispricing was back then. The bearish narrative gripping gold markets back in 1999 proved to be incorrect. The bearish narrative gripping global oil markets today will prove to be equally wrong. We have now come full circle: it’s time for oil, and oil related equities to confound consensus opinion and become market leaders.
The most articulate spokesman for oil’s funeral service is the International Energy Agency. According to the IEA, the world is awash in crude today and will be drowning in it tomorrow. T he surplus, they insist, is not a passing squall but the beginning of a permanent glut, as electric vehicles grind demand to a halt while supply marches forward unhindered by the lack of demand.
In its latest Oil Market Report, the IEA declared that during the first six months of this year, supply outran demand by 1.2 million barrels a day — no small figure. Worse, the imbalance, they say, will nearly double in the back half, swelling to 2.3 million barrels a day. And next year, they promise, comes the coup de grâce: a 3.0 million barrel-a-day surplus, the largest ever recorded. For context, the pandemic year of 2020 — with airplanes grounded and cities locked down — produced only a supposed two million barrel daily surplus—a f igure that most veterans of the trade still suspect to be over-estimated.
The IEA’s longer view offers no reprieve. In its Oil 2025 report, the agency peers ahead to 2030 and sees only a deepening surplus. Between 2026 and 2030, global demand, it says, will inch up by barely a million barrels a day in total, while supply from non-OPEC producers and OPEC’s own natural gas liquids will grow by 1.3 million. Unless OPEC+ performs a miracle of self-restraint, the world will be swimming in crude for years to come.
Small wonder, then, that investors have fled. Speculators on the NYMEX hold the smallest net long position in fifteen years. Equity investors have followed the script: shares outstanding in the big oil ETFs are down thirty percent in a single year. Yet in all this stampede to the exits, very few pause to ask the question that matters most: what if conventional wisdom is wrong?
We have, in fact, seen this play before. Between 2003 and 2007, the IEA dutifully predicted each year that the market would be awash in surplus — about 1.3 million barrels a day, on average. At the time, the oil market was forty percent smaller than today, which made those projected surpluses every bit as menacing as the ones now being forecast.
Reality, however, declined to cooperate. Through 2006 the market held roughly in balance, and by 2007 it had slipped into outright deficit. Investors, having trusted the script, found themselves blindsided. In their rush to correct, they drove crude from $36 a barrel in 2004 to $100 by early 2008, and finally to $145 in a frenzy of short covering. The error was no mystery: too much faith in non-OPEC supply growth, too little allowance for demand. Our analysis suggests that history is about to repeat itself.
In what follows, we will examine the seven central misconceptions behind today’s bearish outlook. The shales, being a story unto themselves, we reserve for a separate section.
Misconception #1: The market is currently in surplus
On paper, the first half of 2025 looked grim: the IEA reported that supply exceeded demand by 1.2 million barrels a day, a bearish starting point if ever there was one. Their calculation was tidy: the “call on OPEC” was 26.5 million barrels a day, actual OPEC output was 27.75, and therefore the world was oversupplied. Case closed.
Except the excess barrels refused to appear. A surplus of that size should have sent global inventories ballooning. Instead, they fell — drawing down by 10 million barrels since January. Faced with this awkward fact, the IEA consigned the discrepancy to a catch-all category labeled “miscellaneous to balance.” Our readers will recognize this for what it usually is: not “miscellaneous” at all, but simply “missing barrels,” a polite admission that demand was understated. In the past, such items have been the surest tell that revisions will come later — always upward.
Strip away the bookkeeping, and the picture looks different. Since September 2022, global inventories have hardly budged: commercial stockpiles down 10 million barrels, government reserves up nine. In other words, the market has been in balance for nearly three years — all while spot prices have dropped by almost 30 percent. The market is not in surplus – instead it has been nearly perfectly balanced.
Misconception #2: Demand growth is weak and slowing
The IEA’s demand ledger for the first half of 2025 reads like a eulogy. Year-on-year growth, they say, was a meager 900,000 barrels a day. Worse, it is losing momentum: 1.2 million in the first quarter, halved to 600,000 in the second, and — if their projections hold — dwindling to just 200,000 by the final quarter. For the full year, they expect only 600,000 barrels of growth, the weakest performance since the 2008 financial crisis, save for the pandemic itself.
But the numbers, once again, refuse to behave. Adjust for the “missing barrels,” and the picture flips: first-half demand growth was not 900,000 barrels but 2.1 million — two and a half times stronger. Nor is demand decelerating; it is speeding up. Growth accelerated from 1.4 million barrels in the first quarter to 2.7 million in the second, among the strongest readings ever recorded. Thus the irony: where the consensus sees weakness and fatigue, the underlying data suggest vigor — demand not slowing, but accelerating.
Misconception #3: Demand “weakness” will continue
The IEA assures us that next year will be no better. Demand growth, they say, will limp along at six to seven hundred thousand barrels a day — the same anemic pace as this year, itself down from last year’s nine hundred thousand. On the surface, the figures look reasonable, a neat extension of the slowdown they report for the first half of 2025.
Yet adjust for the missing barrels, and the neatness disappears. At face value, demand this year is expected to rise by only 600,000 barrels to 103.7 million a day, and next year by 700,000 to 104.4 million. But if the “missing barrel” demand adjustment for the first-half demand is carried forward, the average for 2025 is already closer to 104.8 million — an increase of 1.8 million barrels year-on-year, not six hundred thousand. By that measure, next year’s “weak” growth looks far too low. Even if the pace slows to a modest 1 million barrels a day in 2026, true demand could reach nearly 106 million — a full 1.6 million barrels higher than consensus. In other words, the IEA’s forecast of perpetual anemia rests on a set of books that do not balance.
Misconception #4: Non-OPEC supply outside the US will surge
A flotilla of new offshore projects is coming onstream in 2025 and 2026 — Guyana, Brazil, Suriname. The IEA assures us that these fields will swell non-OPEC output outside the United States by 750,000 barrels a day in each of those years.
The projects are real enough. But the net effect is another matter. We keep a catalogue of every major non-OPEC development, and the history is instructive. From 2017 through 2024, these projects added an average of 950,000 barrels a day of new gross production each year. Yet over that same period, non-OPEC supply outside the U.S. actually fell — down by 100,000 barrels. The culprit was base decline: existing fields losing roughly 1 million barrels a day annually, a natural erosion rate of about 2.2 percent.
For the next two years, the gross additions are expected to total 2.6 million barrels — about 1.3 million per year. To net out at the IEA’s projected 750,000, base declines would have to slow by half, from 1 million barrels per day per year to just 525,000. That would mean the decline rate moderating from 2.2 percent to barely 1 percent, an outcome the rocks themselves have not shown any inclination to deliver.
We have seen this error before — analysts extrapolating gross additions and forgetting that old wells age and die. If history is a guide, net growth will come in far lower, perhaps half the consensus. And with scarcely any new major projects visible beyond 2026, the back half of the decade looks even thinner.
Misconception #5: EV growth will impair long-term demand
The standard projection runs like this: electric vehicle sales will soar through 2030, gasoline demand will collapse, and oil’s long-term growth will wither away. The IEA, in its annual report, obligingly sketches the outcome: global demand growth averaging only 250,000 barrels a day between 2026 and 2030, nearly 80 percent below trend — all thanks to EV penetration. At first glance, the figures make it look as if this transformation has already begun. Adjust for the missing barrels, however, and the story dissolves.
We have long argued that EVs are unlikely to supplant the internal combustion engine on a grand scale, for a simple reason: they are energetically inferior. Once you account for the cost of manufacturing the battery and the inefficiencies of electricity generation — especially when sourced from renewables — the result is an automobile up to 40 percent less efficient than its gasoline-burning counterpart. Hybrids, by contrast, are markedly more efficient than either, and unlike EVs are primed for mass acceptance.
Consumers, quietly, appear to have figured this out. The headline numbers look dramatic: EV sales up 50 percent in the past two years, 220 percent since 2021. But the fine print tells a different story. First, China must be treated separately. As the world’s largest oil importer, vulnerable to blockade in the Strait of Hormuz or Malacca, China has a strategic interest in pushing EVs that can run on its abundant domestic coal. That policy will continue, but it cannot be extrapolated to the rest of the world. Second, one must distinguish between plug-in hybrids and pure battery electrics.
On that score the contrast is striking. Outside China, sales of battery electrics have slowed to a crawl: from 50 percent annual growth between 2021 and 2023 to barely 5 percent since. Plug-in hybrids, meanwhile, continue to climb at nearly 40 percent a year. Consumers outside China appear to understand what the spreadsheets already show: the mass adoption of battery electrics has run into limits of economics and physics. Yet analysts remain entranced, confidently projecting BEV growth will somehow reaccelerate to 33 percent a year through 2035, even as hybrids slow. We would not be so sure. Disappointing EV sales are already testing consensus opinion.
Misconception #6: US shale production will still grow
We have devoted a separate section to shale, but its role in the broader balance sheet cannot be ignored. Only a year ago, the IEA and the U.S. Department of Energy were still projecting robust growth from the shales well into the 2030s. Today both quietly admit the peak is near: 2026, by their latest reckoning.
Our own models, built in 2019, pointed to a peak in 2025 or 2026, and geology has borne us out. The shales are vast, but they are not infinite, nor are they immune to depletion. Their era of relentless growth is ending.
Even now, however, official forecasts remain too generous. The IEA still imagines U.S. liquids rising by 200,000 barrels a day next year and then holding steady to 2030. We believe the opposite is likely: production will fall. The Permian, the last basin still showing year-on-year growth, probably made its high last October on a monthly basis. History gives a clear pattern: once a shale basin peaks, output declines sharply, typically by 30 to 50 percent in the first five years. If the Permian follows the path of the Eagle Ford, the Bakken, the Fayetteville, and the Barnett, U.S. production will not hold flat but fall by two to three hundred thousand barrels a day each year.
Taken together, the outlook is far from the dirge that investors have been humming. The oil market is not in surplus; it is balanced, and the risk runs toward tightening. The great wellspring of non-OPEC growth — the U.S. shales — is faltering, just as U.S. conventional f ields did in 1971 and the North Sea and Cantarell did a generation later. Each time, investors believed in abundance right up to the moment scarcity arrived, and each time prices surged.
The present situation is no different. The barrels from new offshore projects will not flood the world; they will barely keep it steady. Inventories are lean, the vaunted surplus is a mirage, and the story of endless supply is about to meet the reality of geology.
We have seen this movie before. In 1999, the world wrote off gold as a relic; a decade later, it was the best-performing asset in the planet. Today, the same epitaph is being written for oil. Investors should take note. The next great bull market is preparing its entrance.
Curious to learn more now? Read more in our Q2 2025 research newsletter, available for download below.
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