The big news from the weekend is that Russia announced a plan to cut 500,000 b/d (barrels per day) of oil production. This accounts for about .5% of global supply and roughly 10% of Russian oil exports.

This alone isn’t a huge deal, but when you stack up all the factors working against the Russian oil industry, some concern over its stability is warranted. Struggling to break even, the potential of wells freezing and bursting due to crude flow disruptions, the Ukraine War…that’s a hefty list and it wouldn’t take much to throw everything into a tailspin.

I’m not sounding the alarm bells quite yet, but it’s a good reminder as to just how fragile this whole system really is.

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Hey everyone. Peter Zeihan here coming to you from my home away from home, the Denver Airport. It is the 13th of February. And the news over the weekend is that the Russians have announced a near imminent plan to cut 500,000 barrels a day of oil production, which comes out to about one half of 1% of global production. And roughly 10% of Russian exports.

Now, for those of you who’ve been watching me for a while, you know that I’m really concerned about the stability of Russian production, not just because of the war, but because of their geology. Most oil production comes from the permafrost. And if there’s a situation where the crude can’t flow, whether because people are taking the crude away at their export points or because they shut it themselves, the crude in the wellhead freezes into gel and the water that comes up as a byproduct freezes into ice and it pops the wells from the inside and repairing that damage. The last time around took 30 years and last time most of the oil services firms were part of the process. This time they’re gone. So if we do lose Russian oil production for any reason, it’s not just gone. It’s gone for a very, very, very long time. And that is not priced into the market at all.

Now, the 500,000 is probably, probably, probably not a problem. The Russians have about a million barrels per day from the western fields that are not in the permafrost. And so they can shut those in and bring that back on and shut it in again and bring it back online. In fact, they did this in the early weeks of the war last time when people weren’t taking their crude. Well, now we have a couple more things in play. The European oil ban is in place. The European refined products period is in place. It’s not technically illegal to buy or ship these products, but you have to do it without European insurance or vessels if it’s under a certain price point. And that is reducing demand for Russian product around the world because they’re having a hard time getting the stuff out. Also, the break even price for a lot of Russian crude is between 40 and $60 a barrel. And now that the prices that the Russians can charge are under that threshold, the Russians don’t have an economic incentive to pump the stuff in many cases. So 500,000 has taken away half of the buffer. We’re not to the point where we’re going to see permanent shut ins, but we are not all that far away.

Alright. That’s it for me. Until next time.

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