The Beginning of the End of the Shadow Fleet

Hey all, Peter Zeihan here, coming to you from Colorado. Today we’re taking another look at the shadow fleet and the coming shock that’s coming to the oil markets. For those of you who saw the video last week, you know that we basically have a two track path here. The Shadow Fleet is a group of ships that have been transporting Russian crude most recently, and for over a longer period of time, Venezuelan, Iranian crude. 

The idea is that you hide the ownership behind a series of shell companies and flags of convenience. And evade sanctions. Now you have to sell your crude at a discount when you do this. And the captains and the shipping companies that operate the vessels get risk premiums. But in a world where daily demand for crude is 100 million barrels a day, you can’t really shut out all the major players, no matter what you want to do. 

So the Shadow fleet has formed and now has over 1000 vessels worldwide. Well, as of now, it has six less. So we’ve got three things going on at the same time. First, with the United States, the United States has enacted an embargo of Venezuela and has so far, confiscated three tankers, two of which were part of the shadow fleet and one of which was actually completely above board. 

But the Trump administration doesn’t really care right now. So it’s roughly a million barrels a day from Venezuela that is going to go offline. Number two, the Ukrainians have demonstrated that they’re perfectly capable of taking some of their drones, loading them in the back of pickups or into shipping containers, taking them to a different part of the world completely and launching them. 

So in recent weeks, they have upped their attacks on the shadow fleet, and most recently took out a pair of shadow fleet tankers that were in the Black Sea. But over the weekend, we saw attacks on patrol ships in the Caspian Sea, which is nowhere near Ukraine, and they even almost sank a vessel in Rostov on Don, which is a Russian port, just off the Black Sea, and then disabled a shuttle fleet vessel, off the coast of Libya in international waters. 

So the Ukrainians are showing very clearly that you don’t have to be a superpower to use drones against civilian tankers. 

This is going to cut into the profits of anyone who’s operating the shuttle fleet pretty quickly. Because it’s not clear if any of the insurance companies, which are all Russian state or Chinese state that have insured the companies, are going to pay out on any of the claims, because why would you. It’s functionally illegal. And so if you’re a ship captain, all of a sudden there’s a very real risk that you’re going to lose your vessel. that certainly dissuades people from sailing to certain places. That’s number two. Number three, another Shadow Fleet vessel broke down, just outside of Swedish international waters. And the Swedes went and took it over and discovered Russian military personnel on board. 

So now that the Russians have basically started to treat the shadow fleet like a strategic asset, it will start to be countered as a strategic asset. And we’re basically looking at a not so slow motion collapse of the functionality of the fleet and probably on a global basis. So what happens when you remove a thousand tankers from the fleet? 

Well, all of a sudden you go to a severe tanker shortage, which dries up the price of crude for everyone and countries that are under sanctions, Iran, Venezuela, Russia are going to see a significant reduction in their ability to ship. Couple things to keep in mind on that. One Venezuela. Most of the crude production is something that’s called Orinoco Heavy sour. 

It is very difficult to produce and process and ship. And if you have a slowdown in the flows, it will take them months, if not years, to get it back on line. That’s problem one. Number two. Russia. The, Ukrainians aren’t simply attacking the shadow fleet. They’re going after every part of the energy infrastructure, from pipelines to pumping stations to refineries. 

And if the Russians cannot get crude out of the country, they will have no choice. If they want to save their pipelines, but to shut down production in Siberia. And they have maybe a one, maybe a 1.5 million barrels a day buffer where they can shut down their southern fields where it doesn’t get too cold. But after that, they have to start shutting down the northern fields. 

And if they shut down fields in northern Siberia in the winter, they will freeze shut and they will need to be drilled. That will take years. The last time that functionally happened, it was the end of the Soviet period, and it took the better part of 20 years for the Russians to get all of their wells back on line. 

So we’re not just looking at a shock in the oil markets coming next year. We’re looking at a multi-phase shock that hits transport and production in at least two countries. Runs almost a footnote in this. 

Oh, one more thing. The Russians treating the shadow fleet as a strategic asset. That also means a military asset. Now, the Germans and the Danes are directly accusing the Russian government of using the shadow fleet as it’s transiting through the Baltic Sea to launch drones to overfly critical infrastructure like airports. So, if you may remember, before Thanksgiving, there were a number of reports of drones in Europe that were shutting down airspace, that that was all Russian. 

That was all coming from the shadow fleet. So we now have the Europeans in a position that for military purposes, for economic purposes, they feel they have to shut the fleet down. And since the Ukrainians and the Americans are either confiscating or blowing up the fleet, I’m sure the Europeans will come up with something that is much more appropriate to their toolset. 

So expect a lot of interdiction in European waters in the not too distant future. So really exciting times. And as more stuff blows up, I’ll let you know.