The oil industry's boom-bust cycle is self-perpetuating. Low prices cause companies to slash investment and lead to a talent drain as workers leave the volatile sector. This underinvestment, combined with natural production declines, inevitably leads to tighter markets and price spikes years later.

Despite healthy global oil demand, J.P. Morgan maintains a bearish outlook because supply is forecast to expand at three times the rate of demand. This oversupply creates such a large market imbalance that prices must fall to enforce production cuts and rebalance the market.

The oil market initially weathered a major supply shock due to buffers like high inventories and strategic petroleum reserve releases. However, these cushions are finite and depleting, which will soon expose the market to the harsh reality of a slow and complex supply recovery.

For much of 2024, the oil market was cushioned by releases from strategic petroleum reserves, a large volume of oil stored at sea, and unusually low Chinese imports. These "shock absorbers" have now been significantly diminished, leaving the market highly vulnerable to any new supply disruptions.

Current geopolitical events disrupting 20% of global oil supply could spark a massive new investment wave in exploration. This historical parallel is drawn to the 1970s, when a smaller 7% disruption led to the development of major new oil fields like the North Sea and Gulf of Mexico.

While geopolitical events cause short-term price spikes, the more significant threat is a long-term supply deficit. ESG-driven policies have stifled investment in replacing depleted oil reserves. This inadequacy will take years to manifest but could lead to a severe and prolonged period of high prices, far worse than a temporary disruption.

Unlike more volatile shale production, large-scale offshore projects from Exxon in Guyana and Petrobras in Brazil are sanctioned years in advance. This provides analysts with a highly reliable and visible pipeline of new, low-cost barrels, cementing the forecast for a sustained supply surplus.

The U.S. oil boom is associated with shale (unconventional), but conventional reservoirs are geologically superior with higher porosity and permeability. They were the "easy" reservoirs to find and exploit historically. Today's industry focuses on harder-to-extract shale because most large conventional fields are already developed.

Despite his background running a successful energy fund, Tim Guinness believes global oil demand will peak in the next five to seven years, followed by a steady 1-2% annual decline. He notes that a strong oil price can paradoxically accelerate the transition to renewables by making them more competitive.