The crude oil market is currently experiencing a state of extreme divergence: consensus is overwhelmingly pessimistic, yet underlying fundamentals are quietly shifting. Bernstein stated bluntly in its latest report that there is indeed one massive bearish argument in the market today—oversupply. Sluggish demand from China, the unwinding of OPEC+ production cuts, and robust supply growth from non-OPEC producers led to an increase in global oil inventories of over 400 million barrels (>1 million barrels per day) last year. Consequently, market consensus has significantly lowered its oil price forecasts for 2025, with some analysts even predicting Brent crude could fall to $61 per barrel by 2026. However, this is precisely where the opportunity lies for contrarian investors. Bernstein believes that while the market is fixated on short-term supply-demand imbalances, it is overlooking ten key pillars that support long-term oil prices. For investors with patient capital, the current price of $60-65 per barrel is already unsustainable for the industry; capital is fleeing, which is often the clearest signal of a cyclical bottom. As the old adage goes: low oil prices are the cure for low oil prices. Return on capital is now below the cost of capital, rendering the industry unsustainable. At current oil prices, the industry's return on average capital employed (ROACE) is alarmingly low. Bernstein's calculations show that the oil industry needs an average price of $50-55 per barrel just to break even. If oil prices remain at $60 per barrel, the industry's ROACE would be only in the low-to-mid single digits. Looking back, when oil was $64 per barrel in 2019, ROACE was a mere 6%; it only reached 11% in 2024 when the average price was $81 per barrel. Considering the industry's historical average ROACE over the past century is around 10%, the current low returns indicate capital is flowing out of the sector. According to the cyclical investing playbook, when returns fall below the cost of capital and capital begins to withdraw, it presents an optimal entry point for investors. Long-term oil price expectations have fallen below marginal production costs. Oil equities do not reflect the current spot price but rather the discounted cash flow based on long-term oil price expectations. The current 5-year forward price for Brent crude is $66 per barrel, which is too low for the industry. Bernstein estimates the long-term marginal cost of production to be $71 per barrel. When oil prices trade below this long-term marginal cost, the probability of generating positive returns from oil equities increases significantly. This does not mean prices cannot go even lower in the short term, but the odds are shifting in favor of investors. Furthermore, with rising metal and material prices, the marginal cost of production is likely to increase, not decrease. While Chinese demand slows, the "Global South" will pick up the growth baton. The market widely believes the "golden era" of Chinese oil demand is over: diesel demand is declining due to economic slowdown, and electric vehicles now account for 60% of total auto sales. But Bernstein argues the global oil demand story is far from finished. Although demand from OECD nations and China may have peaked, the "Global South" (e.g., Southeast Asia, India, the Middle East, Africa), home to 5 billion people outside China and the OECD, has per capita oil consumption that is only a fraction of Western levels. The aspiration for improved living standards in these countries will drive energy consumption, making them the new engine for oil demand growth over the next decade. Spare capacity buffers are thin, warranting a higher risk premium. Commercial oil companies are producing at full capacity daily, with the only buffer coming from OPEC's "spare capacity." Although OPEC+'s decision to unwind 2 million barrels per day of cuts last year contributed to lower prices, it also pushed effective spare capacity back to 3.4% (just over 3 million barrels per day). This level merely returns to the historical average, equivalent to Iran's production. This implies the global market's cushion to absorb unforeseen shocks, such as war or supply disruptions, is not substantial. Therefore, oil prices should incorporate a higher risk premium. Geopolitical risks are at multi-decade highs. History shows that wars in the Middle East are often accompanied by oil price shocks. Today's geopolitical risk index is higher than at any time since 9/11. While this doesn't necessarily signal an imminent major conflict, a more fragmented world undoubtedly increases the probability of supply disruptions. Market optimism about production capacity recovery in Venezuela and Libya may be naive; the high-risk geopolitical environment supports higher oil prices. A weak US dollar acts as a potent stimulant for oil prices. Data from the past 30 years shows a strong negative correlation between the US Dollar Index (DXY) and real oil prices. A weaker dollar not only benefits emerging markets, the engine of oil demand, but also makes oil cheaper in non-US dollar currencies, thereby stimulating demand. With the Dollar Index showing signs of weakness, this is a positive for all commodities, including oil. Reinvestment rates have plummeted, shortening reserve life. Reserve life is the best leading indicator for long-term production growth. Over the past 25 years, the proven reserve life of the world's top 50 oil majors has declined from 15 years to 11 years. The primary reason is low industry returns, leading companies to prioritize shareholder returns (buybacks and dividends) over capital expenditure. The industry's reinvestment rate (the ratio of capex to cash flow) has collapsed from nearly 100% to around 50%. This underinvestment will lead to weak future reserve replacement and create downward pressure on future production growth. Long-term underperformance of the energy sector presents a contrarian opportunity. The energy sector has outperformed the S&P 500 in only 3 of the past 11 years and has underperformed for 3 consecutive years. The weighting of energy stocks in the S&P 500 has collapsed from 12% in 2011 to just 3% today. Investor interest in the sector has hit rock bottom, but this is precisely the contrarian opportunity. Oil often follows super-cycles; while we may not be in a new super-cycle, the oil industry could still stage another significant cyclical rally before demand peaks. The golden era of US shale oil is drawing to a close. The explosive growth of US shale oil production over the past 15 years (increasing from 5.6 million barrels per day in 2010 to 13.5 million barrels per day) fundamentally reshaped the global landscape. But this "golden era" is ending. Major basins like the Eagle Ford and Bakken are maturing, and even the core Permian Basin is seeing depletion of its prime drilling locations, with production growth showing signs of peaking. Current consensus expects US crude production to be roughly flat with last year's record levels. The rig count is projected to continue declining through 2025, and would fall further if WTI prices remain at $60 per barrel or lower. This means the engine of non-OPEC supply growth has stalled. China's Strategic Petroleum Reserve (SPR) builds. Despite weak industrial demand in China, purchases for the Strategic Petroleum Reserve (SPR) provide crucial support. Last year, China added over 100 million barrels to its oil inventories and is expected to add another 150 million barrels this year. China currently holds approximately 1.4 billion barrels of oil reserves, equivalent to 112 days of import coverage. More importantly, the macro logic has shifted: China holds substantial trade surplus funds. With gold being expensive (over $5,000 per ounce), oil becomes a more attractive reserve asset. With oil prices below $70, China has a strong rationale to continue absorbing physical crude through strategic stockpiling.