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Rick Rule & Mike Rothman
The Oil Market Is About to Break Wide Open

In It to Win It • 2026-06-02
Overview
CreatorIn It to Win It
TitleRick Rule And Mike Rothman Say The Oil Market Is About To Break Wide Open
Sourcehttps://youtu.be/QcyP1m-gjpE
Transcript Date2026-06-02
Host Steve Barten interviews oil analyst Mike Rothman of Cornerstone Analytics and resource investor Rick Rule to assess where the global oil market is heading. Rothman presents a detailed data-driven case that oil inventories have been drawing down sharply for years, that the IEA has systematically underestimated demand, and that OPEC's spare capacity is far smaller than official figures suggest. A Gulf conflict called "Epic Fury" has now disrupted 12 million barrels per day of supply and accelerated the market into a crisis the models had already predicted for late 2026. Both guests concur that current oil prices significantly understate the physical reality of the supply situation, and that a structural multi-year bull market in oil and energy equities is now underway.
Key Points
Quotable Moments
Quotable moments are auto-generated from the transcript. Speaker attribution and quote accuracy should be verified against the original source before republishing or sharing.
Mike Rothman
"Epic Fury basically just put a 300 horsepower outboard on the back of that boat and got us across the river much sooner than we had talked about."
Why it works: a vivid mechanical metaphor that makes the structural bull thesis concrete -- the conflict accelerated what the data had already predicted.
Mike Rothman
"There's not a single instance -- I'm doing this 42 years -- there's not a single instance where missing oil actually showed up. The issue is only resolved when the IEA revises up their demand series."
Why it works: four decades of experience collapsed into one falsifiable claim -- devastating to the consensus view and quotable as a standalone indictment of institutional data.
Rick Rule
"When you don't make the sustaining capital investments, the damage to your ability to produce is cumulative and compounding."
Why it works: concise, technically precise, and applicable far beyond oil -- opens naturally into a discussion of the full $3.6 trillion deferred capex problem.
Mike Rothman
"The single largest determinant of retail gasoline prices in this country is the price of Brent. Not WTI. The price of Brent. It's tied to the global benchmarks."
Why it works: directly refutes the "energy independence means insulation" talking point -- punchy, specific, and useful for consumer-facing content on fuel prices.
Concepts & Ideas
Core Framework -- The Structural Bull Case
The Reconciled Oil Balance Model
Mike Rothman's firm tracks how many barrels physically disappear from the global system, rather than relying on econometric demand estimates. This reconciliation approach reveals that the IEA's top-down demand series consistently undercounts consumption, a gap it eventually closes through upward revisions. The "missing barrels" problem has appeared repeatedly since the 1980s and has never once been resolved by oil showing up -- only by demand numbers being revised higher.
MICR -- The Inventory-Price Model
Rothman built a single-variable oil price model 25 years ago that uses OECD inventory levels to forecast average monthly Brent prices. With an R-squared of 82%, it outperforms most multi-variable models. The model directly links supply disruptions and inventory draws to forward price projections, which is why a 12-million-barrel-per-day loss for even 10 weeks points to dramatically higher prices by year-end.
Crossing the Rubicon -- Spare Capacity Exhaustion
Cornerstone Analytics had already forecast that the back half of 2026 would see OPEC's spare capacity effectively exhausted under a normal demand-growth scenario. Epic Fury accelerated that timeline by roughly two to three quarters. Once spare capacity is gone, any further supply disruption cannot be offset, and the market moves from anticipatory pricing to rationing by price.
Twilight of Shale
A concept developed by Rothman's team (riffing on Matt Simmons' "Twilight in the Desert") describing the negative second derivative in US shale output growth -- production still grows, but at a slower and slower rate. Shale wells have a productive life of roughly five years, compared to decades for conventional fields, making the treadmill of replacement drilling increasingly difficult to sustain without new high-quality locations.
The Four Epic Fury Supply Risks
Rothman identified four specific risk channels at the outbreak of the Gulf conflict: interrupted tanker traffic, forced shut-in of production by Gulf state producers, Iran actively targeting neighboring country infrastructure, and damage to Iran's own production operations. All four materialized within a short period, making this the largest physical supply disruption in modern oil market history.
Practical Principles -- How the Market Is Mispriced
Anticipatory vs. Rationing Pricing
Rick Rule draws a distinction between the current market, which is pricing in some supply disruption expectation, and a rationing market, where prices rise high enough to actually destroy demand. At $111 Brent with deliveries costing $40 more into some markets, the reference price does not yet reflect physical rationing. Rule expects rationing pricing to emerge if the floating inventory north of the Straits of Hormuz is not released quickly.
SPR Releases Rally Through
Every major strategic petroleum reserve release in history has been followed by oil prices rallying through the announcement rather than falling. In 2022 the largest OECD SPR release on record coincided with prices doubling from $70 to $140 per barrel with no actual shortage. The 2026 release, announced at 400 million barrels but containing only 308 million barrels of usable stock with less than a quarter released at time of discussion, is likely to follow the same pattern.
Deferred Capex Compounds -- It Is Not Caught Up Dollar for Dollar
Rick Rule emphasizes that skipping a billion dollars of sustaining capital in one year does not cost a billion dollars the following year -- it costs $1.3 to $1.5 billion due to oilfield services inflation running 8 to 10% annually plus accumulated capacity degradation. This is why $3.6 trillion in deferred upstream spending since 2014 represents an even larger structural hole than the headline number suggests.
Shale Is the Wrong Crude for US Refineries
American refineries spent four decades adding upgrading and conversion capacity to process heavier, sourer crude. Shale produces very light, sweet oil that cannot be efficiently run through that equipment -- it generates too much naphtha and not enough heavier fractions for diesel and jet fuel. The result is a structural export of shale crude to refineries abroad while the US continues importing the heavier crude its refining system actually needs.
Adjacent Frameworks -- Demand and Data
Oil Demand Is Not Price-Elastic in the Conventional Sense
Standard economics predicts demand falls when price rises. Oil has defied this: since 2000, prices are up over 300% while demand has grown 40%. The reason is that most oil consumption is locked into transportation and petrochemicals, where near-term substitution is not possible at scale. Rothman describes this as the "forecastable future" for demand growth -- slow to reverse regardless of price signals.
Emerging Market Demand -- The Blind Spot
100% of global oil demand growth this century has come from emerging markets, yet the IEA's founding mandate was to collect data from OECD member countries -- rich-world importers. Emerging market consumption data is estimated using GDP assumptions and assumed demand-to-GDP ratios, often five or more years out of date, making aggregate demand numbers structurally unreliable. Rick Rule reinforces this from field experience in frontier markets where living standard improvements are rapid and energy-intensive.
Energy Equity Cycle Signal
Rothman identified a pattern where energy equity names significantly outperform the price of oil itself -- which has happened three previous times in the last 20 years, each coinciding with a major bottom in crude prices. 2026 marked the fourth instance. Historically, from such bottoms, oil has rallied for a minimum of three years on a non-linear but sustained upward path, consistent with Cornerstone's multi-year bull forecast made in October 2020.
Implementation
Implementation steps are auto-generated from the transcript content and are provided for informational purposes only. They do not constitute professional advice of any kind. Always consult a qualified professional before acting on any information presented here.
1
Audit Your Energy Portfolio Exposure
Rothman's opening warning is that the people most exposed to higher oil prices are not necessarily those holding energy stocks -- it is investors in the remaining 70 to 95% of their portfolio that runs on cheap energy inputs. Map which holdings in your portfolio benefit from or are hurt by oil above $120 per barrel. This includes airlines, trucking, agriculture, chemicals, and consumer discretionary as potential headwinds, and producers, royalty companies, and energy service firms as potential beneficiaries.
2
Stress-Test Your Thesis Against the Physical Balance
The core lesson from Rothman's work is that the consensus is essentially a republication of IEA numbers, which are systematically too low on demand. Before making any energy investment decision, ask whether your data source reconciles physical flows or uses econometric top-down estimates. If you are relying on bank research, it is likely IEA-derived. Seek out independent reconciled supply-demand analysis, or at minimum cross-check IEA figures against observed inventory changes.
3
Understand the Deferred Capex Timeline Before Buying the Recovery Story
A common investor error is assuming that higher oil prices will quickly unlock new supply. Rick Rule's compounding capex principle shows it does not work that way. Deferred spending does not catch up dollar for dollar -- it catches up at inflated costs, against degraded reservoir conditions, and only after permitting, contracting, and drilling cycles complete. For any producer you are evaluating, look at their sustaining capital spend per barrel versus their decline rate before assuming production growth.
4
Track DUC Counts and Rig Activity as a Leading Supply Indicator
Rothman points to drilled but uncompleted well inventories (DUCs) and active rig counts as the two most useful near-term supply metrics for US shale. DUCs have been drawn down substantially, removing the buffer between drilling activity and production. When DUCs are low and rig counts are falling, there is no inventory of completions to bring online quickly. Monitor the EIA's STEO report monthly for these figures.
5
Watch Diesel and Jet Crack Spreads, Not Just Crude
The diesel crack spread -- the margin refiners earn turning crude into heating oil or diesel -- is the most sensitive early signal of physical tightness in the refined products market. When it exceeds $110 per barrel over crude, as discussed in this episode, the system is sending an emergency signal for more feedstock. Investors in refiners, midstream, and energy service companies should track crack spreads weekly as a proxy for downstream demand pressure that has not yet shown up in headline crude prices.
6
Distinguish Reference Price from Delivered Price in Your Analysis
Rick Rule notes a $40 per barrel spread between the reference Brent price and what some markets are actually paying for delivered barrels. This is not an academic distinction -- it affects the real economics of producers, refiners, and buyers in constrained markets. When evaluating producers in regions with logistics constraints, or buyers dependent on specific shipping routes, the delivered price is the relevant number, not the screen price.
7
Evaluate Energy Equities Relative to the Commodity, Not in Isolation
Rothman's cycle signal identifies moments when energy equity names outperform crude itself as historically preceding major multi-year oil bull runs. If you are assessing whether to add energy exposure, compare the S&P energy sector performance against the underlying Brent price trend over the past six to twelve months. A sustained divergence -- equities leading -- is the setup that has historically resolved with oil catching up over a three-year or longer period.
8
Pressure-Test the "US Energy Independence" Claim in Your Thinking
The practical implication of Rothman's refinery mismatch argument is that the US is not insulated from global oil disruptions even if domestic production is high. US refineries import the heavy crude they need and export the light shale crude they cannot fully process. A supply disruption in the Persian Gulf raises Brent, which directly determines US retail gasoline prices regardless of domestic shale volumes. Build this into your macro energy view rather than treating domestic production as a hedge against global events.
Transcript
This transcript was auto-generated and may contain errors in speaker attribution, transcription accuracy, or formatting. Long transcripts may be truncated due to processing limits. Confirm accuracy and completeness against the original source before referencing or republishing.
[00:00]
Host (Steve Barten): Welcome to In It to Win It. I'm Steve Barten and thank you for tuning in. Today I have two guests who look at the research world from different but highly complementary angles. First is Mike Rothman, founder and president of Cornerstone Analytics. Mike has spent more than four decades studying global energy markets, attending OPEC meetings since 1986, and helping serious investors understand oil, natural gas, supply and demand, inventories, and geopolitics. Also joining us is Rick Rule, one of the most respected natural resource investors of the last 50 years, with deep experience across mining, uranium, oil and gas, and other cyclical resource sectors. Today we're going to connect the dots between energy fundamentals and investment opportunities. The big question is simple: are we entering another major energy bull market? And how should intelligent investors and speculators think about it? Gentlemen, thank you for coming on the show. This is going to be a lot of fun. You two have probably forgotten more about oil than I know. So if there's a dot I'm not connecting, please let me know.
Mike Rothman: I have a presentation prepared for us to go through -- kind of pre and post Epic Fury, the way the world looked, and then what does it actually point to? Why should anybody even care about this, much less the investment implications?
Host: Okay, awesome. What I'm hoping is that you can lay out the macro view for us, Mike, and then we can get Rick's opinion on the investor angle and go from there. If you could share your screen, that'd be great.
Mike Rothman: All right. So in terms of my comments and where this is going to lead us, this is a disclaimer of sorts. Most times, a lot of what is going on with the oil market is very comfortable for people. Most people want to hear that the price of oil is just going to keep getting lower. For investors, it's not the 5, 10, or 30% of their portfolio that might be energy -- it's the rest of the portfolio that might suffer as a result. So treat this as a disclaimer: what we're going to talk about is not what most people will generally be hearing.
Before Epic Fury started, before February 28th, we were already steeped in controversy. There had been assertions in place for 6 to 9 months that there was a glut which was going to turn into a super glut in 2026, that there was a billion extra barrels of oil in tankers ready to pounce on the market. Part of why that glut-to-super-glut story was taking place relates to the demand series published by the International Energy Agency for global oil demand versus our own series, which is a reconciled oil balance model. Meaning we're looking at how many barrels are actually disappearing into the system, not something that's more econometric-based. You've been told that the market this year was going to be oversupplied by 4.5 million barrels a day -- that was the flotilla of crude ready to come to market.
The second issue, which we put right on the doorstep of the IEA, was this idea that oil demand was going to go away. Electric cars, any kind of emerging technology -- somehow these portended the end of oil demand growth. Non-OPEC supply would essentially not become an issue. The market would be comfortable, prices would be steady to low.
Two major issues with that. First, the idea that global oil demand was going to stop growing anytime soon was really pretty much fantasy. If you look at commodities, you were told that if the price of something goes up, demand goes down. Oil is the exception to the rule. For so far this century, oil prices are up over 300%. Oil demand has grown 40%. You're taught it's supposed to be the opposite. This has to do with the nature of oil consumption. Most of it is tied to transportation and petrochemicals. There really isn't a substitute in mass that could dislodge growth in oil demand for what I call the forecastable future.
On the right is where things get spicy. If you looked at the demand growth scenario out through 2030, the idea of no growth was fine because the amount of supply coming out of the 79 non-OPEC countries was going to be pretty limited. That part is actually in line with our forecast. The issue is the gap.
[05:03]
Prior to Epic Fury, there was a wide range of opinions about what the oil market was going to look like over the next several years. We were very bullish. The forecast you see was published basically identical to this back in 2020, which is when we made the controversial call that we were going into what was going to be a structurally bullish oil balance situation. Demand would get back to growing normally post-COVID, about half the rate of global GDP. However, non-OPEC supply was not going to keep pace. The result would be a whittling away of OPEC's spare production capacity and draws on inventories. We're now at 945 million barrels drawn. There was nothing like this in the history of the oil markets. It was completely opposite to the idea that there's a billion extra barrels floating around on ships.
We also made a call a number of years ago about the twilight of shale -- a play on Matt Simmons' book "Twilight in the Desert." The idea was that US oil production growth, dominated by shale, was experiencing a negative second derivative. It would grow, but at a slower and slower rate. That has been playing out. The problem is that in the last 15 years, almost all non-OPEC supply came from the US. So the story was changing.
Where are we coming up with this non-OPEC supply assertion? Just look at spending. We've forfeited about $3.6 trillion in upstream spending since the 2014 high-water mark. The industry was not putting enough investment into growing oil supply. That is a structural problem which a lot of people simply did not want to hear.
As we're getting closer to the start of Epic Fury, the other key controversial point -- aside from the super-glut story, which was basically a lie -- was that spare oil production capacity was essentially less than 1 million barrels a day. This is extremely controversial. Every month the IEA publishes a table saying there's 4.5 million barrels per day of spare capacity. If the market's oversupplied by 4.5 million barrels a day and there's 4.5 million barrels a day of spare capacity, that's 9 million barrels extra per day. No problem. Whatever happens to Iran shouldn't really matter -- which was really not correct at all.
This situation -- spare capacity whittled down so sharply -- was why late last year we talked about 2026 as the year of crossing the Rubicon. The idea was that if we were in the ballpark on our oil balance forecast, the back half of the year was going to see the oil market get extremely tight because most all of OPEC's spare capacity would be exhausted. That remains an extremely out-of-consensus view, but you can see where it's coming from. Saudi Arabia figures prominently because most people say they can produce 12 or 12.5 million barrels a day, when in fact their wellhead maxes out at around 10.7 to 10.8.
[10:00]
So then we have Epic Fury. When this started, we told our clients there are four main supply issues you're going to have to worry about. One is interrupted tanker traffic. Second, countries that can't ship out oil will have to start shutting in production. If Saudi Arabia can't load ships at Ras Tanura and Ju'aymah sufficiently, they're going to have to shut in production. Kuwait will have to shut in. Iraq will have to shut in -- right down the Gulf: Bahrain, Qatar, Oman, UAE. Third, you have to worry about Iran trying to negatively affect production in the neighboring countries. And fourth, you have to worry about oil production operations in Iran being affected.
Those were the four main supply risks. It was inevitable that we were going to lose some supply, but within a fairly short period all four of these happened. If you think about the Iran-Iraq War, when Iraq invaded Kuwait, even the Arab oil embargo -- this is really unprecedented. We have never had this much physical supply disrupted and dislocated from any set of events.
And then of course we have the other war, which has been all but forgotten -- Ukraine and Russia -- with Ukraine overtly targeting production and export capacity. The bigger story with Russia is actually less about the effects of Ukraine's attacks on its infrastructure and more about the erosion in its production capacity. We talked about the US being almost all of your non-OPEC supply growth, and then Russia seeing an erosion in its production capacity. A pretty bullish construct in the scheme of the oil balance.
Everything we do when it comes to the oil balance is always about the effect on inventories. All supply and demand factors intersect at storage. We're talking about inventories in the OECD group of countries, essentially the proxy for global storage. You can see the very strong inverse correlation between inventories and oil prices. 25 years ago I built a model called MICR -- yes, a play on my initials -- essentially a proprietary oil price model that looks at inventories and kicks out average monthly Brent prices. The R-squared is 82%, which is kind of gold for a one-variable explanatory model.
Looking at the production data for March from Gulf producers, we lost basically 11.91 million barrels a day of crude and natural gas liquids. We're not including the Qatar LNG facility, which was also halted -- equivalent to about 1.7 million barrels a day of diesel. That was a problem for diesel immediately because it's the competing fuel.
If you look at the duration -- we're in week nine -- and you offset that 12 million barrels per day by the full volume of the OECD emergency stock release (announced as 400 million, actually 308 million), and assume all of it is released, you get a net inventory effect. Use the MICR model and you see what the price of oil looks like at the end of the year. Brent's at $111 as we speak. We're barely above the five-week loss line and already in week nine. The market has not discounted what's going on in the physical balance, which is why there is still significant upside potential in oil prices. The risks are disproportionately skewed to the upside even at $111 a barrel.
[15:00]
The SPR release was announced at 400 million barrels. The real number is 308 million. We're already past that -- already in the hole in terms of assuming it's all out -- and less than a quarter has actually been released at this point. Every time there has been stock releases from strategic reserves, the price of oil rallies through it. This is a curious phenomenon. In 2022 we had the biggest SPR release to that point. Prices doubled. We had no shortage of oil and the price went from $70 to $140. You don't actually need a shortage to get prices to spike. In this case, we have a bonafide shortage.
The consensus believed inventories were going to build four to four and a half million barrels a week -- roughly 32 million barrels. Five months at that rate is hundreds of millions of barrels of builds. Instead, we're down. And the price of oil is still way too low. Obviously we agree with that.
On energy equities: we made our big call in October 2020 that we were going to be in a multi-year secular bullish story for energy -- oil prices and then the equities. We have vastly outperformed the broad market. Canada has been stronger than the US, not a surprise because people are a little more receptive to what's going on in the energy space. There isn't the level of virtue signaling you have in the US. But we still feel we are in middle innings. This is not the end of that bull cycle.
An analysis we developed a couple of months ago: we looked at what happens when energy equities -- the S&P energy index -- vastly outperform the price of oil. At times, there's been three such instances in the last 20 years where energy names advance greatly relative to the price of oil, and each time it has coincided with a major bottom in crude prices. We felt 2026 would be the fourth bottom. Obviously we didn't know Epic Fury was going to start, but it happened again. The secondary finding: when that occurs and you're thinking about oil prices rallying, it has lasted a minimum of about three years. Not a straight line, but generally you're going to rally for about three years. This is perfectly consistent with our oil balance forecast. We were crossing the Rubicon. Epic Fury basically just put a 300 horsepower outboard on the back of that boat and got us across the river much sooner -- a couple of quarters, three quarters sooner than we had talked about. But there was still a secular bullish story here for oil prices and for the energy names.
[20:00]
Host: Rick, you want to go first?
Rick Rule: No, you go ahead Steve. You're better at charts. Other than the great presentation, I broadly concur.
Host: All right. So basically you were saying there's been an underinvestment of $3.6 trillion since 2014. And that coincides with what you've been saying, Rick -- oil companies have been underinvesting by $1 to $2 billion a day. Is that the cumulative effect Mike is getting at?
Mike Rothman: In my mind it is. The number is $3.6 trillion.
Rick Rule: That's consistent with my numbers, Steve, because what I described was a lack of investment in sustaining capital rather than sustaining capital and new project investment combined. I suspect if you add my two numbers you get close to Michael's.
Host: So you're both in agreement that they've been vastly underinvesting, and the concern is that if they haven't been looking for new oil, is this where you get those missing barrels, Mike?
Mike Rothman: That's a different discussion. Missing barrels has to do with demand underestimation by the IEA. What I'm referring to about the spending is this: oil is not a wasting asset exactly, but when you pierce the reservoir, oil comes up and there are changes in the actual reservoir. You start losing pressure, you have to do secondary and tertiary recovery, and eventually you might get maybe 35% of that oil out of the ground at best. You need to find something to replace it. Shale oil, for instance -- an actual well only has a life of about five years. It's not like shale natural gas, where you can get 25 or 30 years out of a well. So you're trying to bring on new structures to raise production to offset declines from your existing output. Globally, if you remove shale, the world loses like 4 to 6% of its production capacity every year. If nobody spent money on reservoirs and you were producing 100 million barrels a day and did no work, next year you'd be somewhere between 94 and 96 million barrels a day, and it would keep declining. So almost 85 to 90% of CapEx just keeps the treadmill from getting steeper and harder to run on.
Missing barrels is a very old issue. When the IEA was formed in the aftermath of the Arab oil embargo, their directive was to collect and disseminate member country data -- the OECD oil importers. They did not care about the emerging markets. In the 1970s, oil demand growth was dominated by Western Europe, Japan, and the US. But in this century, 100% of oil demand growth is out of the emerging markets, and we have very poor data for country-level consumption there.
What the IEA does -- and I've talked about this with them in Paris in 1987 after an OPEC meeting -- is they take a demand number for, say, Mozambique that's five or six years old, apply an assumed GDP growth rate and an assumed oil demand-to-GDP ratio, and that's the number you see for Mozambique. In Italian sign language that's fugazi. It's a fake number. And even where you have great data, like the US, that oil demand-to-GDP ratio can swing between 0.3 and 0.7.
[25:01]
The issue of missing barrels boils down to something simple. You're trying to look at how much oil is disappearing into the global system. If production numbers -- which are generally regarded as good -- show 100 million barrels a day, and inventories in the OECD are flat, then demand must be 100 million barrels a day. But the IEA says demand was 97.5 million. Where's the other 2.5 million? They say it's on the water. Which is kind of like "the check's in the mail" -- we've been hearing it for 40 years.
The first time missing oil was a big issue was 1987. The IEA was saying there was 300 million barrels on the water -- five days of total world demand at the time. I was at the OPEC meeting with Sheikh Ali Khalifa Al Sabah, the Kuwaiti oil minister. I said: "Sheikh Ali, the IEA is saying there's 300 million barrels of oil on the water -- like a planet-destroying meteor." He had a voice like Barry White, and he looked at me and said, "Michael, that oil's in the Bermuda Triangle, and you'll never find it." [laughs] And of course the oil never showed up. They eventually revised their demand numbers up. That's the recurring story.
In 1999 the IEA was sued by someone claiming they caused economic damage because they put out bad data saying there were 800 million barrels on the water -- a record at that time. I ended up testifying to the Office of Management and Budget because my research at Merrill Lynch was considered the evidentiary matter that the IEA data was bogus. It ended badly for the IEA. The head of the group was fired, they were publicly censured, the oil never showed up, and that's a recurring story. In February 2022, they made 10 years of demand revisions. The missing oil number was up at 2.3 billion barrels -- roughly 85% of the size of the whole commercial stockpile.
The problem is, back in the 1980s when Merrill hired me, there were still people with real supply-and-demand expertise -- reservoir engineers who knew what a crude assay was and how refineries worked. Then we went into a 20-year bear cycle and people stopped caring about oil. The banks just adopted the IEA model and regurgitate it. Which means the IEA supply and demand outlook is actually the consensus outlook. So most investors are saying some version of what the IEA is publishing and taking it as gospel. And there's not a single instance in 42 years where missing oil actually showed up. The issue is only resolved when the IEA revises up their demand series. There are no exceptions to that rule.
Host: Okay, so they're basically mis-forecasting how much we're actually consuming and saying there's this plethora of floating inventory on cargo tankers. That number is up over a billion right now, but--
Mike Rothman: Don't worry about it.
Host: Going back to your slide -- you were basically forecasting that every week the conflict goes on, your projected price toward the end of the year gets kind of nuts. The last one I saw was almost $200 a barrel. Is that right?
[30:00]
Mike Rothman: I'm pretty sure it's north of $180. You're in the ballpark, which is probably the only thing that matters.
Host: It's almost like a parabola -- the longer this goes on, the worse it gets.
Mike Rothman: There are two things to keep in mind. One, we only have one month of data. That 12 million barrels per day loss is March only. We don't know what happened in April. For instance, you heard about the blockade on Iranian ports. Iran was actually producing and exporting almost normal amounts in March -- their production was only down 200,000 barrels per day. Their oil income went up sharply because prices rose so much. So there was no negative effect on Iran like there was on the rest of the Persian Gulf producers. The rest of OPEC's income was down something like 34%, whereas Iran was higher. The question is how much effect did the blockade actually impart? There's no timely production data for that.
There's also no real good inventory data outside the US. Some countries that were reporting inventories stopped -- Japan, for instance -- I think they were trying to prevent a panic and hoarding. We'll get another tranche of data in 10 to 12 days. We just took the 12 million per day as constant and assumed it wasn't worse than the first month. Part of the first month number gets thrown off because Saudi Arabia, the UAE, and Iraq have onshore storage. When tanker traffic is interrupted you can still fill up domestic tanks, but that's a finite number. We don't know it's actually only 12 million -- it could have been more. And then you're waiting for the air pocket of supply that's not being moved normally to work its way through the system. The inventory effects will probably become much more significant in weeks 10, 12, and 14 as opposed to weeks five through seven. It's kind of like getting punched and not seeing the bruise for two days.
Host: Thank you for that, Mike. Rick, you saw the same presentation I did. What are your thoughts as an investor? Give us your macro picture and then maybe we can get into how your brain works translating information like Mike just presented into a thesis.
Rick Rule: First of all, it was a great presentation, because I broadly agree with it. I think it's brilliant. My methodology is very different. I'm not somebody who publishes studies -- I'm somebody who invests money. But I think our conclusions are very similar. I believe first of all that the run-up we've seen in oil prices is anticipatory. It doesn't reflect rationing by price yet. There was some floating inventory. There was also some strategic stockpiles. But what you notice is an incredible difference in price between the so-called reference price and the delivered price -- as much as $40 a barrel delivered into some markets. The price forecasts Mike talks about in the out months reflect something very different: non-anticipatory pricing, pricing where you're actually rationing oil by price. That's something you'll see occur if the floating inventory north of the Straits of Hormuz doesn't get released very quickly.
I don't know, and I don't know that Mike knows, how much floating inventory there is north of the Straits of Hormuz or how long it would last if released -- in other words, how long it would take for the Gulf states to make up for their production hiatus. What I do know from personal experience is the other part of his equation: the damage done to non-OPEC supply, particularly US and Canadian supply, as a consequence of deferred sustaining capital investments.
[35:01]
When you don't make the sustaining capital investments, the damage to your ability to produce is cumulative and compounding. If you forestall a billion dollars in sustaining capital investments in 2025, you don't make it up dollar for dollar in 2026. One problem is inflation -- my input prices as a producer are increasing by 8 or 10% a year compounded. There's also the cumulative damage done to your capacity. So a billion dollars in deferred expenditure generates something like a $1.3 to $1.5 billion liability in terms of maintaining your productive capacity.
A second issue with non-OPEC supply is that our inventory of high-quality undrilled drilling locations is a function of the intersection of geology, oil price, cost of capital, and the social take. If you combine all of those at $65 a barrel, the API has suggested the US has drilled between 85 and 90% of their tier-one or grade-A locations in the Permian Basin, as an example. That number can go up with increases in technology, a higher oil price, lower tax -- highly unlikely -- or a lower cost of capital, but we aren't seeing it.
North of the border, we have more undrilled locations, but Canada has had a federal government for 12 years that has been overtly hostile to the oil and gas business. That may be changing now -- we don't know. But the conclusion is the same.
The other thing Michael pointed out -- one of the things I've grappled with my whole life -- is trying to determine emerging markets consumption. We do know, without having the statistical answer, that when poor people get more money, the expenditures that generate the most utility for them are energy-intensive and material-intensive. When gross family income goes from $3,000 to $6,000 a year, they don't go out and buy an iPhone. The things that materially improve their lives are commodity-centric and in particular energy-centric. Anecdotally, I've traveled the world in frontier and emerging markets looking for extractive resource opportunities -- which inconveniently for me primarily occur there -- and the increase in living standards over the last 20 years in places like Malawi and Myanmar has been really spectacular. And it's very energy-dense. I think consumption has outpaced the ability of institutions to measure it.
And the IEA, I would suggest, has an organizational bias toward other forms of energy. The IEA themselves suggested peak oil demand would take place around 2030. I don't have a number, but 2060 or 2065 feels better to me.
[40:00]
One very interesting statistic I read: global expenditure on alternative energy generation has been somewhere between $6 and $11 trillion. And that expenditure has reduced the market share of fossil fuels by 3% over 45 years. That doesn't seem like the wild destruction of demand, particularly given world population growth increases and the rapid rise in living standards among the poorest of the poor -- who evidence the greatest increase in oil demand.
So you have this wonderful vise. Declining sustaining capital investment. Very little new project investment -- outside of Guyana, probably flat. Declining ability in the US to increase production from tier-one locations at this price point, with this cost of capital, this rate of taxation, and this technology. The inescapable conclusion is that the price has to go up.
I own, as you know Steve, a fairly extensive portfolio of fractional mineral ownership across New Mexico and Texas. One of the ways I measure spending is the number of drilling proposals I get from operators -- the Exxons, Occidental Petroleums, EOGs -- on land where I have minerals. That number has fallen off precipitously. I've had to look for other tax management tools frankly, because drilling is a wonderful tax tool. Beyond drilling -- particularly in the gas side of the shale basins -- a well might generate 85% of its net present value in the first 18 months of production. The production declines are precipitous. You can re-complete these wells after about four years, retreat the frack. But the number of authorizations for expenditures I've received -- not just in development drilling but in re-fracking or re-completing wells -- has also fallen precipitously. Anecdotally, that tells me that non-OPEC production in North America, at price points consumers were paying prior to the Gulf conflict, was simply insufficient to maintain production.
Host: So there hasn't been enough investment worldwide, and unless we get some amazing new technology like shale was, we're going to ration by price. You alluded to it, Rick. Maybe you track this, Mike -- rig counts in the USA are down a lot from years ago. Do you follow that?
[45:00]
Mike Rothman: Yeah. 75% of US production is from shale, and there are two key metrics from the legacy drilling productivity report -- now released as the STEO. One is drilled but uncompleted wells, DUCs. Those have been whittled down pretty dramatically, which means the inventory of completions available to bring online quickly has been pulled down. The other is that drilling itself has gone down sharply at levels where you're not going to be able to sustain capacity. We publish that to our clients every month. They're basically reinforcing what we see as a negative second derivative in output. US production will actually decline for crude in 2026. That's in place. Most people are not prepared for that because most people want to believe reports saying US shale was on its way to 20 million barrels a day. These are real Wall Street firms -- big banks, big balance sheets -- saying it's going to be 20 million a day of shale crude. And the math just doesn't work.
Shale by definition is a short-lived resource. Ghawar in Saudi Arabia has been producing for 70 years. Burgan in Kuwait has been producing for 60-something years. But shale is a different story. And the secondary issue which hardly anyone talks about -- you can see the blank stare when you explain it -- is that shale crude is the wrong kind of crude for US refineries. For 40 years, the industry was building conversion and upgrading capacity because crude feedstocks were expected to get heavier and more sour. Then all of a sudden shale crude arrives -- very light oil, not many impurities. Refineries built for heavy crude can't efficiently process it. They get way too much naphtha and not enough heavier ends -- the gas oils and residuums to crack into jet fuel and diesel.
That's why 6.5 million barrels per day of export pipelines and tankage were built to export US crude. We're still the second biggest importer of crude in the world after China. People keep saying, "Oh, we're independent, we're not going to be affected by Epic Fury." You have to wake up and smell the coffee.
Host: That's happy talk. That's not real life.
Mike Rothman: Yeah, that's four scotches and five cigars on a Tuesday. [laughs] And there's this whole idea that shale was the right crude for US refineries -- if you put light crude into a refinery built for heavy oil, you get way too much naphtha, you can't run your distillation capacity correctly, and you don't have enough of the heavier ends. So that's why it's exported. We're helping tea kettle refineries in China and South America, but it's not really helpful for US refineries. But no one likes to talk about that because God forbid you hit them with a fact.
Host: Okay -- talking about refining, I'm going to share my screen. This is gasoline one-month futures at $3.41. Two months out it's actually cheaper at $3.27. Why is it that with everything going on, gasoline is cheaper than it was back in 2022? Is this also fantasy land?
[50:01]
Mike Rothman: Part of this is that you're not into the summer grade season yet. There are two main seasons in the year for gasoline -- a winter grade season and a summer grade season. Gasoline demand in the United States peaks in the summer, and it's actually harder to make gasoline in the summer due to Clean Air Act vapor pressure rules that started in 1989. The chart you really want to pull up is heating oil or diesel -- that's the real story right now.
Host: Let's go to diesel. There it is.
Mike Rothman: Yeah, even that looks almost understated. What happened on day one was Iran lobbed ordnance into the Qatari LNG facility -- Laffan or Ras Laffan. The equivalent of 1.7 million barrels per day of diesel went offline. Diesel was already a tight market. Day one, the price of heating oil and diesel went up three times as much as crude. And diesel prices and jet fuel prices are the highest they've ever been in human history. The spreads between jet fuel and diesel and crude -- jet cracks or diesel cracks -- are the highest they've ever been, even higher than when Rita and Katrina hit.
It's a secondary issue, but the refining margin is a signal to refiners: give me more of this product. At $110 per barrel crack spread for jet fuel over crude, the system is screaming for more of that fuel. It's giving every economic incentive possible to make more. The problem we see is that if you're looking at this for what it is -- not what you hope it becomes -- the loss of supply because of interrupted shipping and shut-in production from the Persian Gulf is not a Far Eastern problem as many people assert. Yes, 90-something percent of what came out of the Persian Gulf went east, with some to Europe and very little to the US coast directly. But it's a global system. When that Qatar LNG facility went offline, the price of diesel in Topeka, Kansas shot up. There's no immunity by region.
The single largest determinant of retail gasoline prices in this country is the price of Brent. Not WTI. The price of Brent. It's tied to the global benchmarks. If you're thinking the worst is over, I clearly don't agree. And if you're thinking about it from the point of view of actual consumers -- $4.13 or $4.15 prices that we recently had, that is not the top. If I'm right, you're looking at another buck and a half, potentially close to $2 a gallon more at the pump than where we are right now.
I don't trade this. I don't have a vested interest. The reality is the amount of supply that's gone and what it's going to do to prices has not been discounted -- has not played out. And that's with no other assumption than 10 weeks of losses. 10 weeks of losses is not a given.
[55:00]
This standoff between the people running Iran -- which by the way is the Revolutionary Guard, not the mullahs -- and the US government has no expiration date on it. I can't say it's going to be over in 91 days -- that would be a total lie. The answer is we're only assuming 10 weeks of disrupted exports. The longer the interruption goes on, this problem just keeps expanding. And the market is trading as if we only had a disruption of five weeks and 300 million barrels came out of the SPR. The market's not discounting the actual physical reality.
Host: Okay. That was awesome. We're going to go a little deeper with the premium subscribers. Mike, if our viewers want to follow you and your work, how can they do so?
Mike Rothman: Just send an email to sales@cornerstoneanalytics.com. Not that complicated.
Host: We'll put that link down below. Rick, any final thoughts?
Rick Rule: None. Mike, great presentation. Thank you.
Host: Thank you. We're going to continue this conversation in the premium segment -- that's where things get very practical. We'll look at just how exposed the global oil market really is to one critical shipping choke point. Why quick fixes like new pipelines or alternate supply may be more fantasy than reality, and which countries are going to feel the pain first. Then Rick will help translate that into an investor's playbook. Which producers are actually positioned to benefit? What kind of companies may have weakened themselves by returning cash to shareholders instead of investing in future production? And could the real opportunity be hiding in the service side of the energy business? If you're trying to understand how this energy shock could affect markets and your portfolio, join us in the premium. Thank you so much for your support. Have a wonderful rest of your day, and happy trading.
AI Master Prompt
The AI prompt on this page is auto-generated from the transcript content and is intended to support further exploration of the topics, concepts, and conclusions discussed. It is provided for informational purposes only. The user is solely responsible for all outcomes resulting from its use.
Master Prompt -- Oil Market Structural Bull Case
You are a rigorous energy market analyst trained on the structural oil bull framework developed by Mike Rothman of Cornerstone Analytics and independently validated by resource investor Rick Rule. This is not a short-term trading thesis -- it is a multi-year structural analysis grounded in physical supply-demand reconciliation, capital spending data, and institutional data critique. CORE FRAMEWORK The central claim is that global oil markets have been structurally mispriced for years because the consensus is essentially a republication of IEA demand estimates, which systematically undercount consumption in emerging markets. The IEA's methodology is econometric -- it estimates demand using assumed GDP growth rates and assumed oil-demand-to-GDP ratios, often using country-level data that is five or more years old. This has produced a recurring "missing barrels" problem since at least the 1980s. In every single instance over 42 years, the missing oil has never shown up -- the discrepancy is always resolved by the IEA revising demand upward. This is not a coincidence; it is a structural data failure. On the supply side, the industry has forfeited approximately $3.6 trillion in upstream capital expenditure since 2014. This is not a dollar-for-dollar catch-up problem -- deferred sustaining capital compounds at 8 to 10% annual inflation in oilfield services, plus the underlying capacity of existing reservoirs degrades by 4 to 6% per year without intervention. The result is an accelerating structural supply deficit that cannot be reversed in a short cycle. In the US, the Permian Basin alone has had 85 to 90% of its tier-one drilling locations already drilled at $65 per barrel oil. Shale wells produce most of their value in the first 18 months and are largely depleted after five years. The math on US production continuing to grow materially does not work at current capital levels. The Gulf conflict called Epic Fury disrupted an estimated 12 million barrels per day of crude and natural gas liquids supply in its first month (March), plus the equivalent of 1.7 million barrels per day of diesel via the Qatar LNG facility attack -- diesel crack spreads reached all-time highs as a result. OECD strategic reserve releases, announced at 400 million barrels but actually totaling 308 million with less than a quarter deployed at time of discussion, have historically been rallied through rather than dampening prices. In 2022, a similarly scaled SPR release coincided with prices doubling from $70 to $140 per barrel. Cornerstone's proprietary MICR model (R-squared 82%) uses a single variable -- OECD inventory levels -- to forecast average monthly Brent prices, and it has consistently outperformed multi-variable consensus models. Based on the observed inventory draw and the ongoing conflict disruption, the model points to prices north of $180 per barrel by year-end assuming a 10-week disruption -- and the disruption was already in week nine with no resolution in sight. KEY PRINCIPLES - Missing barrels always resolve via upward demand revisions, never via supply materializing - Spare capacity is far lower than official IEA figures suggest -- under 1 million barrels per day vs. the published 4.5 million - Deferred sustaining capital is cumulative and compounding, not recoverable dollar-for-dollar - Shale crude is the wrong feedstock for US refineries -- the US exports shale while importing heavy crude - US retail gasoline prices are driven by Brent, not WTI -- there is no regional insulation from Persian Gulf disruptions - Energy equity outperformance relative to crude has historically signaled a major crude bottom, followed by a 3-plus year rally - Global oil demand is not price-elastic in the traditional sense -- prices tripled this century while demand grew 40% WHAT THIS IS NOT This framework is not a geopolitical prediction about when the Gulf conflict ends. It is not a claim that oil goes up in a straight line. It is not an argument that EVs or alternative energy have no future -- only that their market share impact over 45 years and $6 to $11 trillion spent amounts to a 3% reduction in fossil fuel market share, which is not the demand-destruction story driving IEA forecasts. It is also not a short-term trading signal -- it is a structural 2 to 4 year thesis grounded in inventory reconciliation and capital cycle analysis. HOW TO USE THIS CHAT 1. ANALYZE: Paste in any oil market data, bank research, IEA report excerpt, or news item and I will evaluate it against this framework -- identifying where it relies on IEA demand assumptions, what the reconciled view suggests, and where the analysis is structurally weak. 2. APPLY TO POSITIONS: Describe a holding or sector exposure and I will walk through how the structural bull thesis applies -- what the upside pathway looks like, what the key risks are, and what metrics to watch as leading indicators. 3. STRESS-TEST: Give me the bearish case -- demand destruction, conflict resolution, demand collapse -- and I will work through how each scenario interacts with the supply-side structural deficit and what it would take to materially change the thesis. 4. EXPLAIN THE DATA: Ask me to explain any concept from this framework -- MICR model, missing barrels, DUC counts, crack spreads, tier-one location exhaustion, API gravity -- and I will explain it in plain language tied to its investment implications. 5. SECTOR MAPPING: Describe a company or sector and I will map it against the framework -- producers, royalty companies, refiners, energy service firms, pipeline operators -- assessing how each benefits or is harmed by the physical supply tightness described. 6. MONITOR: Ask me what to track week-over-week to stay current on whether the thesis is playing out as expected or whether conditions are changing materially. TONE INSTRUCTION Grounded, direct, data-anchored -- no hype, no catastrophizing, no cheerleading. If the data does not support a claim, say so. Distinguish between what is known, what is estimated, and what is genuinely uncertain. [Paste your specific question, position, data, or situation here -- or just ask where you want to start.]