By: Christopher Helman – Forbes – Before its war in Ukraine, Russia was producing about 11 million barrels per day of crude petroleum, about 10% of global demand. Since then, amid sanctions, bans, and voluntary embargoes, Russian oil shipments have begun to decline, with the International Energy Agency figuring a reduction in exports of some 3 million BPD by the end of April.
Of the shipments at highest risk of cancelation or redirection are the roughly 1.3 million barrels per day that Russian producers typically shipped via tanker from ports at Primorsk or Ust Luga to European refining centers at Hamburg and Rotterdam.
With Europeans increasingly shunning Russian oil, Putin has to find new buyers. China and India in particular have more concerns about maintaining supplies of affordable commodities than they do about the moral taint of discounted Russian oil and have announced increased purchases.
But swapping sources is not a simple thing. As Credit Suisse investment strategist Zoltan Pozsar explained in an eye-opening recent missive (“Money, Commodities, and Bretton Woods III,” March 31), it can be tougher to rearrange logistics than to find new buyers.
Russia typically ships oil to Europe via Aframax tankers that carry about 600,000 barrels on round-trip voyages of roughly two weeks. Those ships are not big enough to efficiently make the longer voyage, which requires so-called Very Large Crude Carriers (aka VLCCs), holding 2 million barrels. And instead of a two-week voyage, the roundtrip to China requires a two-month sail there, then another two-month return trip empty.
Pozsar calculates that instead of tying up just a handful of Suezmax tankers to deliver 1.3 million bbl per day to Europe, Russia would need a dedicated fleet of 80 VLCCs to get the same flow of oil to China. Problem is, those ships don’t exist. Out of 800 existing VLCCs worldwide, there aren’t any spares.
Naturally, the Baltic Dirty Tanker Index has more than doubled since the start of the war to levels not seen since 2008. No wonder Norwegian tanker billionaire John Fredriksen last week announced the merger of his publicly traded Frontline tanker company with Euronav, in a $4.2 billion deal; the combined company will be the world’s second-biggest operator with more than 120 vessels, behind only China’s COSCO. Russia’s Sovcomflot reportedly owns 110 tankers.
The logistics headache only gets worse. If China buys more cargoes of Russian oil, it won’t need as much from Saudi Arabia — those barrels can instead flow to Europe. But that’s a longer voyage as well, requiring more ships and more time. “More expensive ships. More expensive cargo. More expensive transit fees. Much longer transit routes. More risks of piracy. More to pay for insurance. More price-volatile cargo. More margin calls. More need for term bank credit.”
The same calculus applies to myriad other products. “Russia exports every major commodity imaginable, and the same problems will show up in other products and also with ships that move dry, as opposed to wet cargo. It will be a big mess,” writes Pozsar.
It’s why Pozsar believes that trade is entering a “new world order” where nations seek to build up commodity reserves rather than currency reserves, and where just-in-time supply chains will be replaced by just-in-case hoarding of commodities and the redundant supply chains. He believes that money-printing as a panacea for all economic ailments will end. “You can print money, but not oil to heat or wheat to eat.”
Analyst Neil Beveridge at Bernstein Research likewise sees macro trends of de-globalization and de-dollarization taking hold: “if we are coming to the end of globalization we should expect higher inflation and high commodity prices.” The Bernstein oil team figures that there can be no return to the pre-war status quo, and if it takes longer than a couple of months to secure peace in Ukraine and cancelation of sanctions, the longer-term impact to Russian oil output could be far greater than cuts of 3 million BPD.
There is a historical precedent for the Russian oil collapse; between the fall of the Berlin Wall in 1989 and the Russian financial crisis a decade later, oil output from the former Soviet states halved from 12 million BPD to 6 million BPD due to a brain drain and underinvestment.
With BP, Shell, ExxonMobil XOM -3.4%, Schlumberger SLB -2.9%, Halliburton HAL -2.2%, Baker Hughes BHI -2.7% all pulling out of Russia, Bernstein sees a low likelihood of Rosneft and Gazprom Neft continuing their aggressive horizontal drilling campaigns. And don’t hold your breath for the completion of Rosneft’s $100 billion Vostok oil project, which would require thousands of miles of pipeline, 20,000 wells drilled, and a fleet of 50 tankers to carry what could have been 2 million BPD by 2030.
There will be no quick fix for replacing disappearing Russian oil and gas. Bernstein figures the world’s oil companies will need to boost capital spending by 10% or about $120 billion a year to come up with 3 million BPD of new supply — and not for a few years.
As Bernstein’s Oswald Clint writes, “we’re not yet past the point of no return for Russian oil production,” but it’s getting close.