[ihc-hide-content ihc_mb_type="show" ihc_mb_who="10,13,14,16,18,19" ihc_mb_template="1"] By Mark Rossano SUMMARY U.S. Completions Update and Breakdown of Oil/Gas Spreads (We at a pivotal point)Quick Review of Recent Biden Energy Executive OrdersCrude Spreads, Global Crude Exports, and Weak Refining DemandGlobal Update on Demand Using High Frequency Data China Political/ Military/ Economic Update U.S. Completions Update and Breakdown of Oil/Gas Spreads (We at a pivotal point) The recover in WTI prices across the curve has accelerated completion activity across the US. We expected a quick snap back to the highs of Dec 11th, but the increase in the front of the WTI curve will push us well past 159 as we head into month end. The increase in activity will continue to be centered around Texas with the Permian (specifically the Delaware) and Eagle Ford receiving an outsized focus on activity. This will take us past 160 by the end of Jan with the expectations being 167-175 with some shifts in crews coming over the next few weeks. We have heard more and more reports concerning high-spec rigs in the Midland and other parts of the Permian saying that all of them are contracted through Q1’21. The increase in drilling activity will keep completion crews busy given the amount of DUCs (Drilled but Uncompleted Wells) that remain in the region. By Jan 31st, the Permian will be around 90 active spreads by month end and the Eagle Force back at 20. The additional 10-14 spreads will put us at about 170 spreads to kick off February. Other basins will likely stay the course with limited additions over the next 2 weeks- with the only potential exception being the Williston seeing 1 or 2 added by month end. The current curve has the front 13 months trading above $50 going to Feb 2022, which will support hedging activity well through 2021. This will help keep production in the US stable even if we get a price correction lower over the next 12 months. Russia was very clear about their views regarding the Saudi Arabia (KSA) cut saying not to do it as it would provide new life to US activity. The completion activity is finding support in the oil and NGL (liquids) curve as demand remains robust in the international market. WTI Cushing Crude Curve Mont Belvieu Frac Spread USD/Barrel We are going to start providing a breakdown of oil vs gas spreads as we approach levels needed to hold US production at about 10.9M barrels a day. We have stated that we need to see between 130-140 spreads in order to keep production at these levels, and we are now crossing into this very important threshold. These are still estimates, but it highlights how we are rapidly approaching a level needed to keep US production at these levels. The rally in front month crude provides hedging opportunities, and with Biden’s move on federal land- we are likely to see a rally on Delaware activity in the near term. I expect to see oil spreads approaching 140 by the 1st week of February based on the current trajectory. NGL pricing has softened over the last week or so, but pricing at Mt B for propane and butane still remain supportive and near 5-year highs and well above average. The big draw in propane in today’s EIA report will help support prices in the near term given the robust demand nature over the next several weeks. The support into the international markets remains strong and will support pricing through at least February. KSA cutting production of oil will also reduce the total quantity of liquids available for export. Between reduced supply and logistical issues at the canals, US exports will remain robust and support pricing as local demand outpaces previous seasonal norms. North American Spot LPG Propane Price/Mont Belvieu LST The 4-week rolling average of national spreads will push higher over the next few weeks and track closer to 160-165 as the Permian pushes closer to the 100-level driven by a surge in Delaware activity. The below DUC count shows there still remains running room for activity, but rig counts are already moving higher to replenish some of the areas that have already been completed. E&Ps have been working through inventory over the last 6 months, but we have seen rig activity rise approaching the lows of 316 in 2016. As rigs and spreads rise, we will keep seeing DUCs worked through, but the pace remains slow on the working down inventory- especially in the Permian. We have explained in previous reports why we think the DUC count is overstated including: Wells that aren’t profitable in this price deckSome wells are part of failed drilling programs (child-parent) There are DUCs that were drilled “poorly” falling out of zone or other impediments and will never be completed. The focus for US E&Ps was to maintain production into year end, and we believed the goal was to hold levels until the end of Q2 when companies would reassess. Instead, KSA, cut 1M barrels a day voluntarily in Feb and March pushing the crude curve into backwardation allowing for companies to “hedge- drill- complete.” The price deck still doesn’t promote any real production growth but will allow the US to hold production at about 10.9M barrels a day. There will be more rigs and completion crews coming to market over the next 4 weeks at this point with the pace of additions remaining steady over the next 2 weeks. Baker Hughes Oil Rig Count Quick Review of Recent Biden Energy Executive Orders We are not even into our first full week of President Biden, but yet we have a cancelation of the Keystone Pipeline and a 60-day freeze on new leases on federal land. Many of the E&Ps operating in impacted regions have a backlog of approved permits that this won’t be a big issue in the near term, but if it gets extended or shifted to a new law- this will be a bigger issue. About 10% of Permian basin’s oil production comes from federal land: “To mitigate the risk that a drilling moratorium would have in this region, the oil industry has been stockpiling permits. Between 2018 and 2020, oil companies secured a total of 7,361 drilling permits for New Mexico’s Lea and Eddy counties, the two most actively drilled counties in the state.” At the current rate of completions, the industry has over 4 years of running room in key areas. New Mexico has also said once water rights expire- they will not renew them causing costs to increase as water will need to be trucked in for completions. The problems will be around small companies that don’t have the ability to build out their permit backlog. In the near term, this won’t be impactful to the energy picture in the US, but just highlights the Biden energy agenda will be to address frac’ing and the overall industry. President Biden has once again struck down the Keystone XL pipeline by reversing Trump’s approval of the crossing from Canada into the US. We said back when Trump first reversed Obama’s decision that it would take more than 4 years to actually build the Keystone pipeline as many hurdles still existed in state courts. With the election of President Biden, it was just a matter of time before the pipeline was put back on the shelf- it just so happened to be within the first 24 hours of inauguration. The pipeline was expected to carry about 800k barrels a day of heavy crude down from Canada, with a large portion of it slated to go into PADD 3 refiners and the rest slated for export. Refiners in PADD 3 require about 33-34 API oil, but US shale produces something closer to 42-48 on average meaning that we need to import heavy crude to meet the slate of the asset. Complex refiners with coking capacity max out closer to a slate of 55- heavy/ 45 light because each part of the refining process takes its share of carbon. For example, a heavy slate of crude starts with 1k carbon molecules and each part of the process “steals” its share of carbon- so you can make a balance slate of products with enough carbon to move throughout the catalysts to balance production. The “lighter” the oil the less carbon you start with- so a full light slate would have 100 molecules and by the time you go through the process- you are left with much less carbon to create a chemical reaction and limit the amount and quality of refined products. By canceling the Keystone, we will now rely on other areas to pull in heavy barrels, which is a market that has been tightening as China (Asia in general) and the Middle east bring on new refining capacity. Many of these facilities are complex assets that will require a heavier slate, which increases the competition in the market and hurting spreads. This is made more complex by sanctions taking Venezuela and Iranian barrels off the market mixed with terminal declines out of Mexico. The amount of heavy crude available in the market will be a persistent problem, and our reliance on foreign barrels is a key driver on why the US is NOT energy independent. We require floating barrels, which is why imports have averaged about 7.7M barrels a day over the last 5 years. The US refiner has increased the build out of alkylation units/ reformers/ hydro skimmers in order to process more light/sweet crude and dedicate processes to utilize the abundance of light sweet crude. But even when you adjust the process to be a bit more simplistic, the yields are weak on the back-end of the process where a refiner typically chooses diesel or gasoline/octane because there isn’t enough carbon to create quality product. If the focus is diesel, light/sweet crude will create a strong cut but inherently creates a poor gasoline blend that needs to be significantly enriched. If gasoline is desired, it is possible to avoid some of the diesel creation and keeping the RON of the gasoline at an optimal level. In general, lighter crudes don’t offer the same opportunity to make a broad suite of products that heavy barrels offer. The goldilocks blends remain the “medium sweet” coming from Latin America/ West Africa/ GoM providing an ease of cracking and a wide variety of options on the refined product side. This is why we focus so much time on Angola/Nigeria slates given their status in the refiner/ price premium/ early posting of loading schedules. They normally give a strong indication to the health/tightness in the physical market. Crude Spreads, Global Crude Exports, and Weak Refining Demand The spreads are starting to tighten between Brent and MEH and LLS that will limit new exports from the US. Brent prices at $55.88 vs LLS at 55.08 ($.80) vs MEH $54.88 ($1) will slow the near-term purchase of new loadings as Angola price cuts roll out again and dated brent softens $1.50. The limitations on future US exports will take time to develop, and could easily adjust if the US prices weaken vs Brent- but given the current market dynamics that seems unlikely in he near term. “Angola planned to reduce crude exports to 1.1m b/d in March, based on a preliminary schedule. Sonangol sold three cargoes of February-loading crude to spot buyers, with two of the shipments destined for Asia. One 950k bbl cargo of Dalia crude for Feb. 8-9 loading sold to an Indian buyer: Cargo was previously offered at $1.20/bbl more than Dated Brent on Jan. 11A 1m bbl shipment of Girassol grade for Feb. 21-22 loading sold to GlencoreCargo offered at +$1.70/bbl on Jan. 11A 950k bbl cargo of Olombendo crude for Feb. 15-16 loading sold to a refiner in TaiwanGrade offered at +$1.70/bbl on Jan. 11 Angola is set to export the least amount of crude in March going back to at least 2008. Even with the reduced levels- prices have been cut and discounts issued in order to move volume- as floating storage in WAF is moved into the market. Saudi has also been exporting more from storage and pulling down from stocks instead of increasing production to manage the market. We have talked a significant amount about the importance of understanding the difference between exports and production. KSA has access to “quick” storage of about 50M barrels with a global poll of close to 500M in the market based on solely owned and shared capacity. This provides KSA with the ability to “swap” crude from their tanks to others in key demand areas- especially within Asia. There is enough capacity for KSA to cut production while holding exports higher, but on the flip side- they can increase production and refill the coffers vs pushing it into the market. Why would KSA cut 1M barrels a day of production if they could have used it to rebuild storage at this point or is there a bigger focus on managing storage going forward and trying to unload spare oil? In our last write-up, we went into great detail regarding some potential KSA/ OPEC+ strategies so we won’t begrudge the point here. The underlying remains a big spike in front month crude prices, as the front month spreads remain at around $0- which just means anything positive is in backwardation and negative contango. The positive prices help to pull crude out of storage, but the problem remains in the refining sector that is sitting with a seasonally adjusted record of downtime. The record amount of downtime in refining capacity is a problem because as we see refiners keeping runs low- global refined product builds remain the normal. Typically, we are at maximum run rates due to the heating demand with peak seasons being winter/summer (Driving) and shoulder season spring/fall. The fact that we remain at such reduced rates with product builds rising around the world points to the problems in demand declines persisting. The below regional aggregate indicators from BNEF highlight how we have seen a roll over in congestion and driving data through January. The China slowdown will be a big impact as Lunar New Year approaches, which is the largest migration holiday in the world. During the period, many urban workers return home to their rural families and stay there for 10-20 days. The spread of COVID in China is limiting travel as we can see below with driving now about 20% below normal and falling quickly. The rise in cases below is becoming a bigger problem, because some of these outbreaks are in rural areas that the government admits is much harder to track. The rising cases and swift response (welding people into homes) has limited travel in China and will cause a big slowdown in travel for the holiday. The State Council is already discussing ways to reduce rural area travel. Early estimates are indicating that travel will be 40% below 2019 levels, due to restrictions and onerous testing schedules in order to facility movement- especially with out-of-pocket payments required in most cases. The economy is going to take a hit due to the slowdown in total consumption and travel, but China isn’t the only place seeing a drop in mobility and economic activity. On Wednesday: China recorded 126 domestically transmitted confirmed cases and 97 asymptomatic cases.That’s up from the 88 new confirmed cases and 43 asymptomatic cases on Tuesday.The biggest jump in numbers came from Heilongjiang, which reported 41 new cases. [1] Based on regional indicators, movements around the world are moving lower and disappointing vs expectations as lockdowns are extended throughout Europe and parts of Asia. Europe has seen an extension of lockdowns across key countries in the EU. Germany, Italy, and Netherlands are maintaining many of their restrictions with Germany extending some of the strictest measures through April. The German reaction is in response to the inability to get cases back into their designated “comfort” zone, which will keep the lockdown prolonged. The outsized time spent talking about Germany vs other European nations is driven by their weighting given economic size and support provided within the EU. The heat map below provides a closer picture to the issues regarding mobility and general economic indicators. Even with the lockdowns, Germany has been able to maintain some normalcy in industrial production, which has supported truck toll miles and exports. France is now talking about another potential lockdown as cases and hospitalizations have risen over the last few days. They have already instituted additional testing for those landing at their airports. Cases in France have started to rise again, while in Germany they remain elevated with the government’s comments stating that adjustments won’t happen to lockdowns until they come back to early Oct levels. They have already stated some closures, such as restaurant in-door dining, won’t return until April. Based on the below chart, this would move France back in line with other nations at this point, but they are still much tighter vs the beginning of Q4. European economic data and general mobility speak to weakening economies that will result in more stimulus and rising potential for a double dip recession (our base case scenario). The budget deficits below will only get worse as lockdowns and restrictions remain in place hindering economic expansion. Italy has narrowly avoided a government dead lock for now and increased stimulus measures by over 30B euro with more to follow on the back end. The budget balances for 2021 are set to get much worse especially if we get another double dip recession as GDP shrinks and tax revenue remains a big problem. Stimulus to unemployed workers and struggling businesses will also be a weight on government finances and pressure budgets. Borrowing (ECB stimulus and bond buying) will need to accelerate again in order to close the widening gap as 2021 deficits expand. The below daily activity indicators highlight the steep slowdown that is hitting many countries- especially Europe with all main countries taking another leg lower. The hope was to see a holiday “spike” that would fade and be less severe due to restrictions, but so far- the wishful thinking as given way to more concerns of managing a weak economic backdrop. The consumer and service sector remain a broad European problem with the manufacturing/industrial side holding firm in November. But based on the data below, we saw a big drop off in Dec and Jan that will reflect weakening data to kick off Q1. Global Update on Demand Using High Frequency Data Asia is a big demand center and growing for all things energy, but India has seen a bit of a slow down from Dec into Jan. Diesel sales remain about 6.6% below Dec and down 3.5% vs last year- all of which points to stagnate activity within the industrial/manufacturing complex. New cases in India have so far flatlined, which is a net positive as restrictions still remain in some locations to limit/stop the spread of new strains of COVID19. Exports are now back positive (.14%) as imports had a big spike to 7.56%- which is a positive as we see demand increasing domestically and a refill of the supply chain/inventory. Exports have been a bit slower due to logistical issues across the supply chain both within India and abroad. This will limit exports in the near term, but the recovery will be steady as long as COVID remains contained within the country. Some of India’s largest trade partners are still experiencing large increases in COVID cases and lockdowns while the military/political issues with China (their largest trade partner) hinders total flow. Even as things have started to improve, consumer sentiment remains fairly week, which is being reflected in the M/M gasoline numbers (still outperforming y/y). India refinery utilization has held constant at about 95% internally and 80% for assets that primarily export products. The export market remains crowded, which will keep utilization rates fairly capped on the export market. Diesel will remain the key bellwether to watch for industrial production and manufacturing- which will still take some time to normalize. The lockdown index/ consumer sentiment/ congestion index/ retail recreation will be the places to watch in order to gauge the magnitude of the recovery and speed of the economic recovery and crude demand. On the whole, the global economy is slowing down again as COVID headwinds impact mobility and general economic activity. China has shifted lower again now back below the “100 mark” as developed and emerging markets start rolling back over. Now- I am clearly not a global macro “bull” at the moment- but I thought we were going to have a normally slow January that was going to climb back to Dec levels. Instead, we got halfway back to Dec levels as the data has started to shift back down. The reduction is occurring across many fronts, but the most concerning ones remain jobs/ retail and just general consumer activity. The leading indicators have shown some robust manufacturing data, but it has so far been driven by restocking supply chains/inventory and less about feeding a rise in consumer demand. This is also pushing prices higher and leading to inflation while wages remain depressed across the board. South Africa is going to be one to watch as they have seen a huge increase in COVID cases/ deaths in a very short period of time. The country is facing a COVID outbreak from what appears to be a variation to COVID19 that is spreading quickly and escaping detection: “Preliminary data from South Africa suggests that the novel variant 501.V2 wasn't recognised by antibodies in 21/44 serum samples collected from people infected in the first wave - worth watching today's presentation for more info & caveats https://youtube.com/watch?v=Ja_tLG8CLAc.” Mining activity has dropped significantly, which is a common theme around the world driving up commodity prices as well. Supply disruptions as well as “reflation” hopes and stable demand have caused huge rallies across many commodities- Copper/ Iron Ore/ Coal/ Grains. Hong Kong has announced a lockdown in the Kowloon region as COVID spread intensifies in the region with more restrictions rolling out in China as well. Other parts of Asia are experiencing increases in cases as well- Japan, South Korea, Indonesia, and Malaysia- resulting in lockdowns and slowing economic activity. The below chart highlights the significant reduction of activity that COVID is creating in Japan across jobs and general mobility. South Korea is experiencing something similar in regards to economic pressure, but had a nice increase in trade activity that should see some additional momentum as the electrical supply chain remains constrained and inventories are low. China Political/ Military/ Economic Update A big focus for us remains China and the changing tides in the region with a lot of moving parts to kick off the year. President Xi is attempting to deliver reforms on the supply and demand side of the country/economy. The pressure is mount with economic data being revised lower to help prop up y/y data points. The below is an example of how just recently fix-asset investment levels were adjusted going back to 2010 by a fairly wide margin. Fixed Investment calculations are used to derive different parts of GDP, and an adjustment would have direct impacts across key metrics reducing overall economic growth. You may say: “That doesn't matter too much in the grand scheme of things; what's a few percentage points?” The bigger issue is the political anxiety that is forming over the economy, which is being reflected in the extent/scope/complexity of the revisions. The political concerns over economic growth could push the CCP to have the PBoC to adjust course and instead of tightening lending/liquidity and instead maintain a very accommodative policy. The above type of “adjustment” is why I question China’s GDP figure of 6.5%- beating estimates of 6.2%. Industrial production has been supported by exports into the market as supply chains need to be restocked, but this also points to a big problem in the China “recovery” narrative. The supply side move is short lived as the supply chain is recharged, and it has been subsidized by the Chinese government in order to keep prices low for exports. Raw material prices have increased to 5-7 year highs, but China has wanted to grow market share in the trade space in an attempt to support the recovery. The cost of which is estimated at 1.2% of GDP- so as China slows down the pump of credit/liquidity in the market prices will be forced higher. “The share of global trade increased as pandemic-related exports surged. Already the world’s top exporter, China’s shipments increased 3.6% in 2020, according to official data. Total world trade likely contracted 5.6%, according to estimates from the United Nations’ trade and development body UNCTAD.” As economies are slow to recover and demand remains weak with limited activity, trade will continue to be a drag on global GDP as we see this persisting through Q1- it will also lead to a drop in distillate demand as less ships move throughout the system. Global foreign direct investments is estimated to have fallen by 30-40% this year, but China was able to attracted about $130B as the country opened up their bond markets further to foreign markets. “Sovereign debt was added to the FTSE Russell benchmark index, completing the country’s inclusion in all three top global bond indexes. Foreign investors bought 1.1 trillion yuan ($170 billion) of Chinese bonds in 2020.” These were all positive contributions to GDP, but the bigger issue is the growing dislocations with retail sales and fixed investments. Retail sales have been weak throughout the year with the most recent data coming inline down 3.9% but Y/Y missing estimates and posting 4.6%. China had several retail sales events (two Amazon Prime type days) that lasted longer vs last year and yet numbers have been a drag on underlying Chinese data. Chinese spending has grown over the last 10 years, but the pace was already slowing as we headed into 2020 from the peak of mid-2019. President Xi started talking more about the need to stimulate domestic demand as early as 2018, and it has now become center policy with the “dual-circulation system.” Some great comments from Trivium breaking down some of the data: China’s GDP increased 6.5% y/y in real terms in Q4, which was driven with the following backdrop: By sector, real GDP in Q4 was driven by: 4.1% y/y growth in the primary sector versus 3.9% in Q3 2020.6.8% y/y growth in the secondary sector versus 6.0% in Q3 2020.6.7% y/y growth in the tertiary sector versus 4.3% in Q3 2020. Despite the good news, there is one big caveat to China’s recovery, and the key piece is the heavy reliance on capital expenditure and industrial output: Fixed asset investment rose 2.9% y/y in 2020.Value-added output at industrial firms increased 2.8% y/y in 2020.But retail sales fell 3.9% y/y.And here’s another worrying stat: Household consumption expenditure fell 4.0% y/y in real terms last year, despite the 2.3% y/y increase in GDP growth. The weaker retail sales numbers underscore how unbalanced China’s recovery remains.And this is concerning for another reason as well: Strong growth in fixed asset investment and industrial production will be hard to sustain as Chinese officials withdraw stimulus and seek to normalize monetary policy.Credit growth fell sharply last month (see January 13 China Markets Dispatch).This will start to weigh on capital expenditure.Real estate investment growth slowed to its weakest since June last month – 9.2% y/y versus 11.5% in November.Infrastructure investment in December increased at its slowest pace since March – 4.2% y/y versus 5.9% in November. Monetary policy will stay the course, said Sun Guofeng, director of the monetary policy bureau (PBoC): “In 2021, monetary policy should be stable and not make sharp turns.” The retail consumer is also facing more pressure on food costs and other daily purchases, which has pushed China to go out and import the most grains ever or at least near all-time highs. This has driven prices up to 2014 highs as the chart below highlights. The reduction of demand in the Chinese market across the consumer level is showing up in refined product demand. We have seen a slowdown in consumption across gasoline and diesel, which has also slated more capacity for export. Even though oil imports were at 28-month lows, we still had elevated exports in refined products. The exports will remain elevated now that Lunar New Year is being impacted across the board: China Gasoline Exports China Diesel Exports The PBoC is attempting to pull some liquidity out of the market, which will directly impact direct investments as they try to reduce bonds/loans that can be seen in the credit impulses below. The move lower on credit will cause large parts of the business cycle indicators to fall and start the process of normalizing a massive debt bubble. Debt within China is at 280% of GDP and when we throw in financial institutions closer to 360%. Some of the near-term liquidity can be reduced with repo rates, as it is a quick way to pull some cash out of the system. Within the CCP planning committees, there is a disagreement on GDP targets with some wanting to maintain over 6% and others wanting to have “soft” targets around 5%. This would provide some flexibility to pull debt out of the system and try to normalize the risk levels that are expanding. This is a quick summary of the CCP’s focus (aka Xi comments): There is a clear focus on redistribution and addressing inequality. Xi specifically said that officials need to address “regional inequality, urban-rural inequality, and income inequality.”Building self-sufficiency in technology is a strategic imperative. The government will identify technological choke points and task companies with addressing them.Financial de-risking is here to stay. Deleveraging, reducing overcapacity, and reducing housing inventories all remain high priorities, and are a clear signal that credit growth will remain relatively restrained in years to come. We have spoken extensively on each of these topics, and the problem is some of these goals can only be achieved with stimulus and lending. The final point though will need to be an overarching driver as problems remain within the global markets. Infrastructure spending is getting more and more expensive as these input prices go higher across the board: While pressure remains internally, China also has a lot of exposure in struggling countries and infrastructure projects that are far below revenue estimates. The overhang these assets cause on collateral/ bad debt expense/ cash flow that will be a growing problem. Many of these projects are missing even worst case revenue projects BEFORE COVID so now with the impacts of a global pandemic it will become an even bigger headache. China has been able to foster additional trade by rail into Europe- helping to offset some of the bigger issues around the Belt and Road Initiative. “Rail Rates to haul goods to Europe from China have more than doubled because of tight capacity. Shortages of ocean-going vessels continue to push more freight onto rail networks. In addition, air freight capacity remains tight because the continuing slump in passenger travel has pulled belly-of-the-plane space out of the system. Shanghai-Europe air freight costs are up more than 90% week-over-week, according to the TAC Index.” “Strong customer demand for products from China continues to push up transport costs around the globe, and that’s likely to support earnings for companies that lease the boxes and equipment used to haul all those goods.” This has been a positive contributor but shipping prices have skyrocketed, which has caused slowdowns that will persist over the coming quarter. The costs highlighted below ON TOP of the rising input costs (raw materials) is why we see more downward pressure on China data. The investments across Africa are becoming a much bigger liability as the pain grows. On another front that feeds into the above problems, it is the growing divide between the US and China. Genocide. On his last full day as U.S. secretary of state, Mike Pompeo labeled China’s treatment of ethnic Uighur Muslims in Xinjiang as genocide. The declaration isn’t one to be made lightly – the U.S. is the first country to make such a determination – but it’s unclear at this point what action it might compel by Washington. Notably, though, incoming Secretary of State Antony Blinken said during his confirmation hearing on Tuesday that he agreed with the determination, so if Beijing was hoping that this issue would somehow go away with the Trump administration, it sure looks unlikely. Russia trains Indian troops. India sent its first group of military specialists to Russia for training in the operation of Russia’s S-400 air defense system. The first batch of S-400s is scheduled to be delivered to India by the end of 2021. The U.S., which is courting India as a military ally against China, opposes the sale.” If Pompeo didn’t have approval from the incoming administration the terminology would have been much softer- something along the lines of “potential human rights violations.” The fact that the “genocide” word was used is a big step forward in calling out China’s treatment of the Uighur Muslims in the country. This comes on the back of the PLA not showing up for the virtual MMCA summit that has been held every year since 1998: “On Monday, the US and Chinese militaries participated virtually in the Military Maritime Consultative Agreement (MMCA), a three-day summit to discuss safety mechanisms. At least that was the plan until the representatives of the People’s Liberation Army (PLA) failed to show up. Some context: The MNCA has typically been held twice a year since 1998. According to US sources, this is the first time the PLA has been a no-show.” This is a bigger problem as friction mounts in the South China Sea. The freedom of navigation acts won’t be slowing any time soon given the pressure in the region with China’s build out of bases on the contested islands highlighted below. The problems aren’t going to go away with more friction in Laddak along the LaC with both sides increasing military personnel and equipment in the region. Russia and India are now in full training mode as Russia/Australia were quick to show support with India post the attack. The US may come out and say they don’t want India to train with Russia, but this is purely rhetoric and we have no problem with them working together. The below chart helps to highlight where clashes continue to happen with fishing/ commerce/ oil and gas exploration. The friction points are only going to intensify as countries face a weak economic backdrop, which will push for a narrative that is abroad to blame. China is going to need to build a narrative as pressure grows internally and external investments struggle. An overarching problem across the world remains food security and poverty that was already starting to worsen ahead of COVID19. The below helps to highlight how food insecurity has been rising over the last 6 years and with the recent locust (a new swarm now), bird flu, and drought/flooding impacting crop yields – it is set to get worse. The problem is being exacerbated by poverty worsening across Africa and South Asia. Many of these countries have also received investments from China, which only increases their risk on a debt side- but also highlights the global pain inflicted by COVID19 that will remain in the system well past 2021. Extreme poverty and food insecurity is only going to worsen as economic growth deteriorates around the world. This decade is setting up to be a painful one filled with inflation/ deflation/ hyperinflation narratives as jobs languish and wage growth is non-existent as logistical issues and prices move higher. [1] https://mailchi.mp/24a8a3b4fb5b/dont-improvise?e=21cdcdff2c [/ihc-hide-content]