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Hey, everybody, Peter design here coming to you from clarity Colorado. It is the sixth of August a Sunday and a lot has gone down in Ukraine in the last 72 hours. I’m gonna try to catch you up on first of all on Friday at fourth. In the early hours the Ukrainians used enabled drone to hit a Russian military vessel and amphibious vessel in the port of overseas on the northeast shore of the Black Sea. Now, all by itself, this is kind of a big deal. The Ukrainians have been building naval drones of increasing range, explosive power and sophistication. I’m oversimplifying here, but basically take a motorboat, seal it up on the top loaded with a metric ton of explosives and just you know, motor it right into a target. They’ve been using these for several months to hit military vessels in the vicinity of the port of Sevastopol, which is an occupied Ukraine. And they’ve been so successful that the Russians have largely evacuated the military vessels from the region completely and moved them back to places like Novorossiysk in Russia proper. The problem that the Russians have, or really any conventional naval force is going to have is conventional naval forces are designed to strike over the horizon on a ballistic trajectory traditionally, or maybe use cruise missiles. And when you’re dealing with something that’s so low in the water, like a motorboat, the weapons cannot get a negative inclination, it’s necessary to shoot down at them. So you’re limited to using things like RPGs and bazookas and small arms fire in order to target them, and you can’t detect them till they’re close. And by the time they’re close, the main ship weapons are useless. And so the Ukrainians have damaged and destroyed any number of Russian military vessels and forced them to basically abandon their Ford millet military position in naval terms.
They then a couple of weeks ago, used a couple of these to target the Kerch Strait bridge. And remember that the Ukrainians have no access to the Sea of Azov at all the Russians have conquered all parts of Ukraine, the border that so the Ukrainians have to launch from places like Odessa and seal all the way around the peninsula to do it. So these things already have a decent range. But over CSK is even further away in the Black Sea is a relatively rough body of water. So in order to strike there, one of two things has to be true either number one, they’ve the Ukrainians have experienced a quantum leap in terms of range and pretty much nothing on the entire Russian coast of the Black Sea is safe anymore, or they are working with a third party in order to deliver these vessels closer to target. Of course, the Russians are going to say that it’s the Brits and the Americans, but a far more likely candidate is Turkey. Now Turkey is the second military power of the region. And historically speaking, they’ve easily been able to out punch the Russians on the Black Sea simply because the Russians are spread out among multiple bodies of water, the Pacific, the Arctic, the Baltic, and none of them can reinforce. Whereas the Turks have controlled the straits that go through Istanbul, and specifically the Bosphorus and the Dardanelles, they can easily move their forces from the Mediterranean to the Black Sea and back. Now we’ve seen the Turks starting to change their strategic policy on this region, from thinking of the Russians as a potential asset and a partner to something that they might actually be able to eliminate. The Russians have done so badly for so long in this war, that the math in Ankara seems to be that you know, maybe with a little push from us, we can just break Russian power completely. And if all it causes them is to smuggle a few motorboats, basically, from here and there in order to destroy the Russian strategic position, it might be worth it. I don’t have any specific information indicating that that is actually happening. But the logic holds, and the Turks are in the process of re evaluating everything. But regardless, it doesn’t look like there are now any places in the Black Sea, where the Russians need to be able to operate where they can operate safely. That’s kind of piece one. Piece two has to do with commercial shipping. Because yesterday, the fifth on Saturday, the Ukrainians hit a tanker called the CIG, which is a Russian flag tanker that makes it run between Novorossiysk again, and the Syrian port of Tartarus, typically carrying aviation fuel, which is critical for any Russian operations in Syria. Now, it was hit on the way back, so it was empty at the time, and it wasn’t sunk, but they did hit the engine room. And if this is the beginning of a trend, we’ve got a real problem for a lot of people. Let’s start with the Russians, the Russian position outside of Russia proper. When you’re dealing with operations, either in Latin America or Africa, they’re dependent on free movement of the seas. And if they can’t move men material and fuel in and out of the Black Sea, they’re kind of host. So this is a hit on a very important strategic asset for the Russians. And if this is the beginning of a trend of the entire Russian position globally is going to go up in smoke in a very short period of time because of lack of fuel and the inability to reach people in the first place. The second problem has to do more with civilian shipping because the Ukrainians now
offset in the aftermath of hitting the CIG, that they are going to treat every ship coming in and out of any Russian port as a potential target, which you know, you kind of understand where they’re coming from because the Russians have been doing this for Ukrainian ports since the beginning of the war.
If the Ukrainians stick to their guns on this, and at the moment, no one in the international community outside of the Russians, or is basically saying anything, then a lot of the Black Sea is going to become a no go zone for Russian vessels of any type or any third party vessels that want to go in and out of Russian ports. And unlike Ukrainian ports, where the world has kind of gotten used to that, this is a shock that we haven’t experienced just yet. Now, for those of you who’ve been following me since the war, especially if you’ve been bitching at me for getting some of my more specific forecasts on international trade wrong, it’s because we haven’t had this sort of blow up yet. My concern early in the wars that we’re gonna have a short, sharp shock, in which Russian and Ukrainian stuff in and out of the Black Sea was simply going to go offline all at once, and that was going to have a catastrophic impact on prices. That hasn’t happened. And honestly, I’ve been very surprised about Moscow and Kyiv have shown a lot of restraint. That now seems to be in the past. The Ukrainians have now already had a ship, the Russians are specifically threatening anyone who comes in and out of any Ukrainian ports as well. And it’s probably going to become a bit of a free for all in the not too distant future. And the Ukrainians have now demonstrated that they can strike several 100 miles from their ports that should be enough to reach anywhere in the Black Sea, where there is a vessel coming to or from a Russian port. And they have given the world’s civilian ships two weeks to basically abscond from the region. Now, the way insurance works is in a normal situation, you pay one or 2% the value of your hole every year for an insurance policy. If you sail into a war zone where people are shooting, that goes up by roughly a factor of 100. And if you sail into a war zone where someone is actively targeting civilian vessels, you just can’t get a policy at all. So we could see the entire position of maritime shipping globally in this region just kind of evaporate over the course of August. That takes out potentially takes out one of the world’s largest oil and ore and
green export facilities, which is an overseas going to secondary one at two opso, which is a little bit further down the Russian coast and the northeast shore, the Black Sea
that can hit any number of things very, very badly. The Russians don’t have the ability to redirect the stuff anywhere because there are other export points are either already maxed out places like Primorska on the Baltic or the cold call and the Pacific are already operating at maximum capacity, the rail system is already at maximum capacity. And the only other alternative would be to go through Ukraine which and take it to the port of Odessa, which is under embargo. So if this is shut down, it really goes away a
couple of complications here number one Russian crude if it gets locked in oftentimes in the winter, these wells freeze solid and they would have to be re drilled. So it’s going to be offline for years, maybe decades. Second, not all crude is created equal. And the crude that is exported through an overseas country opposite kind of falls into two rough buckets, you have approximately 3 million barrels a day that is exported through these two points total. Half of it is Russian crude, which is a medium sour, and half of it is a called CPC blend, which comes from Kazakhstan, specifically the tangy super field on the northeast shore of the Caspian Sea goes by pipeline and overseas. CPC blend is super light and super sweet. Now the medium is sour. If you remove that from the market, the biggest beneficiary is probably going to be Canadian select which is a heavy sour blend that comes out of Alberta. And if you remove CPC from the market, the biggest winner is probably gonna be us shale crude, which is also super light, super sweet. But in both cases, you’ve got two big customers. The first is East Asia, primarily China and there is now no longer anywhere that the Chinese can go to get replacement volumes because the Europeans have already grabbed it all up in the aftermath of the war. The second big customer base is going to be in the Mediterranean basin, where the companies in the region have basically swore off Russian crude and have gone for CPC blend. If CPC becomes unavailable, their only real option is gonna be us shale crude. Now luckily, US shale has been expanding in leaps and bounds over the last several months and years, especially since COVID started a lead up and it’s nearing record levels. And it’s only going to go up from here. So there is a possibility here that the western side the European side of these disruptions, is actually able to replace what they need from North America, whereas the Asian side just gets completely hosed. Which you want to talk about reordering the international strategic environment. If you take the majority of this 3 million barrels of disruption and lay it on China while the Europeans just kind of you know, hold their nose and take American crude that really reorders a lot of things in the international air
economic system, especially since the Chinese are already experiencing what can be best described as something between an economic slowdown and a sharp break, because they’re no longer capable of generating their own demand at all at the same time, they’re entering into an ever more bitter trade war with the rest of the world. So we’re looking at the Russians losing their strategic position in the water. At the same time, they lose their strategic position in terms of economic penetration, they lose the ability to project power through the wider world. And we get a reordering of international energy, which really hurts the Chinese and the Russians. This is getting really interesting really fast. Now, there’s still a lot of eyes to dot and T’s across the Ukrainians and the Russians still have to make good on their threats. This doesn’t automatically happen. But that does seem to be where we are headed right now.
Okay, sorry. This one was so long, everyone. Take care. I’ll see you next time.
