Thread by @Roach_Resources

#EFT #CoalTwitter #OOTT

People are making the case that Russian #Oil and #Coal are fungible, and will make their way into global supply via eastern markets or huge discounts no matter where the war in Ukraine heads.

They will, but that’s missing the point.

Thread Time 1/n⬇️

First, a lot of those barrels and tons don’t have easy 1:1 alternative markets. For instance, Europe’s thermal plants and steel mills are tailored to Russian Kuzbass, Donets, Pechora coals - buyers can adjust mixes to an extent, but…

2/n ⬇️

that means pulling coal for a comparable blend from elsewhere on the seaborne market - not exactly easy, or cheap. Meanwhile, logistical shakeups like this make supply side shocks a lot more disruptive; see Queensland and NSW this year. Prices go ⬆️

3/n ⬇️

On the liquids side, Europe takes over 50% of Russia’s crude exports; China another 20%.

The ESPO already runs near max capacity; If Europe tries to wean off Urals, how much more tanker volume can the East handle? How much more do their refineries even want? 4/n ⬇️

Second, and more importantly; the economic damage the West just dealt Russia is unprecedented. Big boy banks are already guessing at the GDP drawdown ranging from 7-12% - the USSR’s collapse saw it drop 10%

For context, Russian crude production dropped 40% from ’88 to ’94. 5/n⬇️

What do you think Russian production capacity looks like 2, 3, even 5 years from now?

Venezuelan oil saved us last time - who steps in this go around?

6/n⬇️

Petro and Coal reserves don’t just develop themselves.

They require large capital outlays and experienced persons interested in sticking around to see them through over over the span of years.

7/n⬇️

Maduro didn’t kill PDVSA in a day, he killed it over half a decade by starving it of capital and scaring away the folks who knew what they were doing - that’s what’s at risk of happening in Russia.

8/n⬇️

The impact of this globally obviously gets insulated by whatever demand destruction occurs domestically in Russia (bleak, I know).

Oil rich nations typically have lower income elasticities for liquids relative to the global average, and Russia is no exception.

9/n⬇️

Russia consumes ~1/3rd of the oil they produce. If their production halves, and domestic demand only drops ~8%, where is that export gap made up?

similar vein: electricity demand is extremely inelastic in the short run, & Russia consumes over 50% of the coal they mine

10/n⬇️

What happens to their coal export capacity ~5 years from now if they fail to inject adequate capital into mine development?

In a world that won't lend capital to fossils, but can't scale nuclear quickly enough, you have to ask:

Where does that difference get made up?

11/n⬇️

Long story short:

Nowhere on this planet is going to be happy about any sustained shocks to Russian fossils export capacity, and that’s probably exactly what’s coming.

Recession risks are mounting, and energy might be the only safe haven you can expect