RUSSIAN Oil Industry Starts to Break Down DEC 2023

[00:00:03]Hi, welcome back to Joe Blogs. In today's episode, I want to provide you with an update as to what's happening in the Russian economy, and more specifically, Russian oil production.

[00:00:13]Prior to the COVID pandemic, the Russian oil industry was producing around 11 million barrels of oil per day. Today, it's producing less than 10 million barrels per day. And one of the problems that Russia is facing is that over the last 20 months, they've lost access to both partners in the industry. Companies like ExxonMobil, BP, and Shell have all walked away from Russia, so they no longer have any involvement. And the loss of those relationships is causing Russia multiple problems. Firstly, those companies were providing capital. They were investing into the facilities, making sure that they were up-to-date, making sure that everything was working perfectly, and that there would be no production problems. Secondly, they were providing the latest cutting-edge technology. And as you'll know if you follow the channel, one of the focuses of the sanctions has been to cut off Russia's access to technology. So that's causing them problems. And thirdly, they've lost expertise, because those multinational companies who are living, eating, and breathing oil 24/7 have the world's experts. And what you need if you're Russia is to have access to that level of expertise, because the vast majority of Russia's oil deposits are in inhospitable areas that have very cold climates. Now, obviously, Russia have said that there's no problem whatsoever, and the production is carrying on as normal. But over the course of the last few months, we've started to see cracks appearing in that story. In July, Russia announced that it was cutting its production voluntarily by 500,000 barrels per day as part of the OPEC+ reduction that was led by Saudi Arabia. The following month, Russia announced that it was cutting a further 300,000 barrels per day, making the total cutback 800,000 barrels. And in September, Russia announced that it was banning all exports of refined oil products as a result of shortages that were occurring in the Russian market.

[00:02:14]And this was the first time that we'd really seen anything tangible being reported in terms of problems within the Russian oil industry. Now, Russia has now announced that the 300,000 barrel oil production cut will remain in place until the end of 2023. And the 500,000 barrel cut will stay in place until the end of 2024.

[00:02:34]And the export ban on gasoline is also to remain in place for the rest of this year. And this gives us a strong indication that things are not going well in the oil production industry. So, in today's video, I'll have a look at the latest announcements about these production cuts. And also talk about what Saudi Arabia is doing because they are the leading party in terms of OPEC plus trying to keep the price of oil high by cutting back on production.

[00:02:57]We'll then have a look at the historic levels of Russian oil production and see how they compare to what's happening today. We'll then go on to talk about what the financial implications of these cuts are on the Russian economy because Russia needs as much income as it can get at the moment. So, the last thing that you would think it wanted to do is cut back on its most valuable export product. We'll also talk about the fact that President Putin has now announced that he's going to run for the presidency in March 2024. And we'll talk about who the leading candidates are to stand against him. And then finally today, I'll wrap up with my summary. So, what I think is going on in the Russian oil industry right now and what the implications of this are for the Russian economy. But before we get started on all of that, I'd like to say once again, thank you so much to everybody that's bought me a coffee or sent me a YouTube Super Thanks. And also thank you so much to all my patrons and YouTube members.

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[00:03:56]Russia has announced that it will continue the additional voluntary supply cut of 300,000 barrels per day from its crude oil and petroleum product exports until the end of December 2023. This cut of 300,000 barrels is in addition to the 500,000 barrel per day cut that was announced in April, which Russia has announced will be in place until the end of December 2024.

[00:04:19]Deputy Prime Minister Alexander Novak said the additional voluntary cut is intended to strengthen the measures taken by OPEC plus countries to maintain the stability and balance of the oil markets. And he went on to say that Russia is currently deciding whether it should deepen its voluntary export cuts or increase production. Saudi Arabia has also confirmed that it will continue with its voluntary cut of 1 million barrels per day. Saudi Arabia, which is OPEC's de facto leader, first made the voluntary cut in July as an addition to the 2 million barrel per day cut that was announced by OPEC plus in April.

[00:04:56]Now, in terms of discussing the impact of the oil production cuts on Russia's oil industry, I wanted to look at how much oil Russia was producing prior to the invasion of Ukraine and how much it's producing today. And this chart shows the daily production of crude oil for the last 5 years. And what this shows is that between November 2018 and April 2020, Russia was producing on average 10.9 million barrels of oil every single day. And one thing to note about this chart is that the scale on the right-hand side starts at around 9 million barrels per day and goes up to around 11.5 million. So, if we start off by looking at what happened in May 2020, as a result of the COVID-19 pandemic and the lockdowns that were introduced all around the world, the demand for oil fell. And as a result of that, Russia cut its production from 10.9 million barrels per day in April to 9 million barrels to May, June, and July. And this represented a real problem for the Russian oil industry because Russia doesn't have anywhere to store large quantities of oil. And if we have a look at this chart, which shows the movement in the price of Russian oil over the last 5 years, it shows that at the start of 2020, a barrel of Russian oil was selling for $71. However, by April 2020, the price had fallen to $20. And you can see from the shape of this chart that that actually represented the low point for Russian oil prices. And throughout the rest of 2020 and 2021, prices recovered. And by the end of 2021, a barrel of Russian oil was selling for around $80, which was higher than it had been trading at the start of 2020. But if we now go back to the oil production chart, you can see that even though the price of Russian oil was rising, the total amount of oil that Russia has been producing has never returned to the 10.9 million barrels per day that it was producing prior to the pandemic. By the end of 2020, Russia was producing 9.7 million barrels per day, which represents a reduction of 1.2 million barrels per day against the pre-COVID production levels. And by January 2022, which was the month before Russia invaded Ukraine, total production was up to 10 million barrels per day. So, still 900,000 lower than it had been before the COVID pandemic, which on an annualized basis is around 330 million barrels. And an average price at that time of around $80 per barrel, that represents lost income of over $26 billion for Russia. If we now look at what's happened to production levels as a result of the invasion of Ukraine, you can see that in April 2022, production fell to 9.1 million barrels per day, which was the lowest figure that Russia had seen since the COVID-19 pandemic hit. However, production increased over the following 12 months, and by February 2023 was up to 10.5 million barrels per day. Now, as we've talked about in today's video, in April '23 Russia announced that it was cutting its production by 500,000 barrels per day, and then subsequently announced a further cut of 300,000 barrels. And total production right now is sitting at 9.9 million barrels per day, which is 1 million barrels lower than the average that Russia produced between 2018 and the start of 2020. And in terms of assessing the impact of that on the Russian economy, at the current price of $74 per barrel, a loss of 1 million barrels per day equates to an annualized loss of $27 billion for the Russian economy. However, the situation is actually worse than that because you need to also take into account the fact that Russia is selling its oil at a discount as a direct result of the sanctions that are being applied against Russia. And if we compare the current price of $74 against the market price of Brent crude oil, which is running at $86, that represents an additional $4 billion of income lost. So, the total impact on the Russian economy of this cut in production is a direct loss of $31 billion in revenue. However, the risk to the Russian economy is far greater than that because by cutting production, Russia is running the risk that when it wants to increase the amount of oil that it's taking out of the ground, that it could encounter production problems, and it may not have the technology or the expertise to be able to rectify those problems. And therefore, it could find itself in a position where it's no longer able to draw 10.9 million barrels per day out of the ground.

[00:09:20]In a further threat to Russian oil sales, China oil refinery utilization rates are easing from record third quarter levels as thinning margins and a shortage of export quotas discourage Chinese refineries from raising output for the rest of 2023. And this drop in Chinese refinery output could reduce crude demand for the world's top importers and cap global oil prices, as well as pushing up China's crude oil inventories, which will therefore dampen demand for Russian oil. Chinese state refiners, which cashed in on lucrative fuel exports earlier in the year, see little incentive to boost throughput as Beijing is unlikely to release more fuel export permits this year. An official at the Chinese Sinopec refinery said margins are almost disappearing as we're processing highly priced crude while demand for refined fuel is weakening.

[00:10:11]And he added that the plant is trimming its runs by around 20,000 barrels per day this month to the lowest level this year. Poor industrial demand for petrochemicals is also not helping.

[00:10:22]Consultancy Energy Aspects recently trimmed its forecast for China refining runs in November and December by 100,000 barrels per day to average 15.65 million barrels per day in the fourth quarter.

[00:10:35]Sun Jian, an analyst from the business, said our quarter four runs are facing more downward pressures given recent teapot run cuts driven by both plunging margins and crude import shortage.

[00:10:46]Utilization rates of Chinese oil teapots in the refining hub of Shandong province are averaging about 57% down from 65% in early October, marking the lowest level since May 2020 when activity was curbed by China's COVID-19 restrictions. The reduction came after refining margin slumped to around $27 per metric ton in October, a 2023 low, and as Russian oil became more expensive. The slowdown in refinery activity has seen China's overall crude inventory rise by 2 million barrels over the past 2 weeks to 958 million barrels. In Shandong, crude inventories are at about 220 million barrels, which is below the August peak of 230 million barrels, but above the 150 million at the beginning of 2023.

[00:11:36]Another China-based oil trader said, "China teapots are more price sensitive now than a few months ago, and are in no rush to stock up on more oil."

[00:11:46]Vladimir Putin has announced that he's decided to run in the March presidential election, a move that will keep him in power until at least 2030. Putin, who was handed the presidency by Boris Yeltsin on the last day of 1999, has already served for longer than any other Russian ruler since Joseph Stalin.

[00:12:05]Opinion polls show Putin has an approval rating of 80% inside Russia, so the election is a formality as he has the full support of the state, the state media, and almost no mainstream public dissent. Whilst many foreign diplomats, spies, and officials say they expect Putin to stay in power for life, there has been until now no specific confirmation of his plans to run in the March 2024 presidential election.

[00:12:28]Kremlin spokesman Dmitri Peskov said in September that if Putin decided to run, then nobody would be able to compete with him. While Putin may face no real competition in the election, the former KGB spy faces the most serious set of challenges any Kremlin chief has faced since Mikhail Gorbachev grappled with the crumbling Soviet Union more than three decades ago. The war in Ukraine has triggered the biggest confrontation with the West since the 1962 Cuban missile crisis, and Western sanctions have delivered the biggest external shock to the Russian economy in decades.

[00:12:58]And in June, Putin faced a military mutiny, which was led by Russia's most powerful mercenary Yevgeny Prigozhin.

[00:13:05]The mutiny was quickly put down, and Prigozhin was killed in a plane crash two months to the day after it started.

[00:13:11]The West has cast Putin as a war criminal and dictator Russia into an imperial-style land grab that has weakened Russia and forged Ukrainian statehood while uniting the West and handing NATO a mission. However, Putin presents the war as part of a broader struggle with the United States, which the Kremlin elite says is trying to cleave Russia apart, grab its vast natural resources, and then turn to settling scores with China.

[00:13:37]So, what's the summary and conclusion today? Well, I wanted to post this video firstly to update you on what's going on in the Russian oil industry. Russia has now announced that the production cuts that were put in place earlier this year will remain in force. And it said that this is as a result of trying to support the OPEC+ decision to cut back on overall production. But, you have to raise a question as to whether or not that is actually the situation. When you look at what Russia was doing prior to the COVID pandemic, it was producing almost 11 million barrels of oil per day. And one of the things about the oil industry is that it's based on economies of scale. It's very expensive to set up oil drilling facilities, particularly for countries like Russia, where the oil fields are based in inhospitable places with very cold climates. So, once you've got everything in place and set up, what you need to do is produce as much oil as possible to try to recoup all of that initial investment and to make as much profit as possible. And the other thing about oil production is that once you get the flow started, the last thing that you want to do is interrupt that flow. You want that oil to keep coming out of the ground nice and smoothly and as freely as possible. And what we've seen from today's data is that during the COVID pandemic, Russia had to cut back on its production. It then started increasing its production back up again.

[00:14:57]However, it never got back to the maximum capacity of 11 million barrels per day, which indicates that there may have been some issues as a result of the fact that production was choked during the COVID pandemic. Russia then decided to invade Ukraine, and obviously as a result of the sanctions, once again, it had to cut back on its production. Now, between May 2022 and February 2023, production did start increasing again.

[00:15:24]However, I think it's really interesting that Russia have announced these voluntary cuts in production at a time when the Russian economy is on its knees. Russia needs as much income as possible that it can get from its most valuable export. So, it seems a very strange decision for Russia to say we're happy to cut back on 800,000 barrels per day. And when we're talking about current market price of $74 per barrel for Russian oil, that equates to around $59 billion of lost income. If you follow the channel, you'll know that in 2022, Russia posted a net deficit of more than $40 billion.

[00:16:06]And so far this year, the deficit is even higher. So, it's likely by the end of 2023 that Russia will be posting another deficit of $40 or $50.

[00:16:17]So, the last thing that President Putin wants to do right now is say that voluntarily they're going to cut back on production and lose almost $60 billion in cash because Russia can't afford to be doing that. So, that indicates to me that there may be other reasons why Russia have announced these production cuts. And it goes back to what we were talking about at the start of the video.

[00:16:38]Following the sanctions that were introduced against Russia, they've lost some of their biggest trading partners.

[00:16:43]Shell, BP, ExxonMobil have all walked away from their businesses in Russia.

[00:16:49]And these companies are involved in designing and building many of Russia's facilities. So, they basically owned everything and have just walked away and left Russia to it. And the problem that Russia is now facing is that it doesn't have the expertise in-house or access to the technology that it used to have. So, as and when production problems start to arise, which they absolutely will in these inhospitable places, the Russian businesses that are now running these facilities may be struggling to solve the issues, which may explain why Russia is voluntarily saying we're happy to cut back on our production because they've just got less oil coming out of the ground. And one of the other things to note about Russia is that they don't have any significant storage facilities.

[00:17:32]So therefore, if oil is coming out of the ground which they can't sell, there's nothing they can do with it. And the problem that Russia would face is that if it does produce a surplus, which it can't get rid of, it then will be forced back on its production. Because once all of the Russian tankers are full, there is nowhere else for that oil to go. So I think the overall summary of today's video is that the Russian economy is currently struggling. It needs as much income as possible. Its most valuable resource is oil, and the export of oil represents the single biggest income line on the Russian P&L.

[00:18:06]So it does seem very surprising that Russia is voluntarily cutting back on its production at a time when the price of Russian oil has actually been going up. So this could bring in valuable income into the Russian economy. And I think there is a big question mark as to whether or not Russia is doing this voluntarily or if they're now starting to encounter production problems as a result of the fact that they've lost all of their historical relationships. And if that is the case, then that represents a major problem for Russia.

[00:18:37]Because as time goes on, it's likely that production levels will continue to fall, and that will equate to less revenue for Russia at a time when it really needs as much as it can get. So hopefully you found today's episode useful, informative, and thought-provoking. If you've liked what I've said, then please give me a thumbs up. Thank you for watching this video all the way through to the end, and here's something to put a smile on your face.

[00:19:23]>> Mhm.