Rick Rule On Energy

We’ve recently featured noted resource speculator Rick Rule’s views on gold and silver, but Rick’s also one of the most experienced and insightful experts I’ve ever run across in energy as well.

So I was glad to see Rick focus on energy in his latest interview for Sprott Media, and happy to share it here.

Dear Fellow Investor,

Being born and raised on the bayou, so to speak, my friend Rick Rule likes to tell me stories of his youth spent in the oil patches of Louisiana and Texas.

I thoroughly enjoy these tales, not only because Rick’s such a talented storyteller (he’s been a stock broker for decades, after all) but also because very few people realize the depth of his experience in the oil and gas industry.

Everyone thinks of him as the ultimate mining speculator — and not as an expert in oil and gas.

So I was very happy to see that the latest installment of interviews with Albert Lu of Sprott Media was focused on energy and industrial metals.

Plus, the timing was perfect: The price of the near oil contract had just plummeted deeply into negative territory — an event that was not only unprecedented but previously unimaginable — and it was great to get Rick’s take on the event.

Once again, this is a lengthy interview that touches on a wide array of important subjects, including how the demand and supply disruptions resulting from the global pandemic shutdown will affect prices of many commodities, and how investors can play these extraordinary developments.

Here’s a brief excerpt from the interview to whet your appetite, but I urge you to read or watch the whole thing here.

Rick Rule On Energy And Base Metals

Albert Lu: The discussion today is going to be industrial materials and I think it’s going to be an excellent discussion for investors out there. I want to lead, though, with something that happened this week. I know you spent a lot of time in the energy market, Rick. And what we had is something very strange in WTI. You have essentially oil flowing into what is essentially a landlocked hub, with diminishing storage capability. You have a futures contract linked to that, without a provision for cash settlement. And what we had was the front contract for WTI riding that contango curve down, crashing into the spot price, through the spot price, and actually going negative for a little while.

I just want to ask you, of all your years working in energy did you ever imagine that you would see a negative price for oil?

Rick Rule: Albert, nothing even close to what we witnessed. And it’s a testament to your financial mind that you were able to describe it so succinctly. There’s a whole bunch of lessons here.

One is the perils of securitization, because these financial instruments are put together by people like me, who don’t imagine all of the things that could go wrong. The idea that you would have to pay somebody $30 a barrel to take the obligation, to take oil, is highly amusing. The circumstance, of course, relates back to the discussion that we’re going to have today, in many ways, the most important of which I guess is that we have witnessed, as a consequence of the unwinding of 10 years of economic growth and, in particular in this case of the economic slowdown fashioned by this virus, an astonishing erosion of demand.

You will recall that oil markets had been weak for some time. There has been for probably six years a pretty strong amount of surplus-producing capacity. This capacity itself is, I would suggest to you, a function not just of the technologies that you and I have talked about before — fracking, three-dimensional seismic measurement while drilling, horizontal drilling— although all of those have been important, because the real increase in oil production on a global basis has been American and that American production is extraordinarily capital intensive despite the technological advances that we’ve talked about.

I would argue that unnecessarily, and unusually, and I might even say stupidly, generous equities markets and manipulated debt markets — which is to say extraordinary liquidity and artificially low interest rates — were really responsible for the production boom to a greater degree than any advances in technology.

Now, we had a situation where a market was oversupplied and the consequence of that oversupply was that existing exporters were having to make room for increased American market share. Two principal competitors — really three principal competitors, but two in this drama (Russia and Saudi [Arabia]) — were competing with each other both for prime Asian markets and prime European markets [and] couldn’t come to a conclusion and decided stupidly, I think, to duke it out.

On top of that, of course, the COVID-19 virus really, really, really reduced demand. A year ago global demand was estimated depending on the season and the circumstance to be between 95 and 97 million barrels a day — sometimes falling a little, sometimes increasing a little. The consequence of the COVID-19 virus is that estimates suggest that up to 20 million barrels a day in demand went away. The fact that you don’t encounter any competition on the freeway and can’t fly anywhere is ample testimony to the reason behind that statistic. So you had a circumstance where the world was oversupplied at any rate and then a whole bunch of demand went away and it didn’t go away slowly.

This isn’t something like electric vehicles reducing the auto fleet over 30 years. This reduction in demand happened very, very, very quickly. And then, as you say, the futures contract, but, in fact, also the U.S. physical infrastructure had some challenges. The oil couldn’t be sold. It began to back up first of all, of course, in the producers’ tanks, and then in the processors’ tanks. And then in the transmission system. And finally it came to one of the largest tank farms in the world, in Cushing, Oklahoma, and at the end of the day there was no place to put the oil.

As you suggest, this is a circumstance that has never occurred even in remote fashion in my life.

I have certainly seen booms and busts. You have heard me say in these interviews that bull markets are the authors of bear markets and that bear markets are the authors of bull markets and that the cure for high prices is high prices. All those sort of market homilies are all true, but normally this takes place over two or three years.

To have this disruption in the market in this brief a period of time isn’t merely unprecedented in my lifetime. It’s unprecedented in the history of the modern oil industry.

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And That’s Just The Beginning...

I love to share the best of the investment intelligence with my readers, and trust me when I tell you that the rest of Rick’s interview is packed with valuable and eloquent insights covering a wide spectrum of important topics in the energy and base metals markets today.

You’ll truly enjoy reading the entire piece and get tremendous value from it as well.

Simply click here to get the rest of the interview.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference