Primary Vision Insights – April 27th, 2020

Primary Vision Insights – April 27th, 2020

By Mark Rossano

Sections:

  • U.S Frac Spread Count to Fall Below 100
  • U.S. Remains Flooded with Crude- June to Go Negative
  • PADD 3 and EIA Data Coming into Greater Focus as Tank Tops Getting Hit
  • U.S. WTI June Futures Heading to $-3 and Brent to $7: Break Down of U.S. Tank Space
  • China Refined Product Exports Surge into a Massive Oversupply
  • Price War Continues Away from the Screens
  • Crude and Product Glut to Continue as the Terrible Economic Backdrop Comes to Light
  • Terrible Economic Data Only Made Worse by Rising Food Inflation/ Crop Damage/ Shuttered Facilities
  • Quick Geo-Political Round-Up
[restrict]

U.S Frac Spread Count to Fall Below 100

The frac spread count will continue its march to 50 this week with a drop below 100. The below breakdown helps drive home the pace of the slowdown, and how the brunt of it remains in the Permian. The whole basin will see crews fall below 50 by the beginning of May for the first time since 2016. The decision on where to stop drilling first was designated based on crude quality and hydrocarbon mix, but with the gross oversupply across the globe- most activity will be slashed. Only areas with premium takeaway, contractual obligation, or best crude quality/mix will receive any attention. Shut-ins have already started to ramp up across the basins in order to stem slow the oversupply. Pipelines have begun telling producers to cut volumes next month, with the most recent coming from Shell. “Shell has warned oil producers using Permian pipelines that customers may need to cut volumes next month by 10%-50% as U.S. storage fills, according to two people who asked to not be named because the information isn’t public.” “Co. advised that its Zydeco pipeline may declare force majeure on May 1, one person said.” This comes on the back of shell shutting Convent, Saraland CDUs, and reducing Norco by 20%. These conversations are already happening ahead of May, and E&Ps will have no choice but to shut-in as the ability to store near the well pad is limited. Schlumberger has come out with announcements confirming our view that spreads will reach 40-50, and SLB has guided to about 15 spreads active spreads, which is likely to fall closer to 10 if the current realized prices at the well-head persist. HAL has disposed of about 1.8M horsepower over the last 2 years because of weakened demand, field rotation, unplanned maintenance, consolidation, or been deemed unusable. There will be more equipment to leave the OFS space as production and activity converge to a “new normal”. U.S. production is likely to fall another 1M barrels a day quickly as shut-ins accelerate into May with more pipeline restrictions, tank tops, and sheer economic pressure.
Pressure remains across the oil complex, as the oversupply increases and realized prices stay well below any form of break-even. Condensate (Naphtha) prices are negative across the board once you factor in shipping and NGL realizations are firmly negative after pipe and storage expense. Activity in the U.S. isn’t coming back anytime soon, and the loss of rigs and frac crews will also result in a decline in diesel demand. We have already seen a large step down in diesel demand, which is only beginning as more equipment is rationalized lower.

National Spread Count Seasonally Adjusted- Reaches a New Low

Permian Frac Spread Count Seasonally Adjusted

The consensus remains that as the market reopens everything will normalize because global oil demand destruction has bottomed. I agree that we have reached the bottom of demand destruction, but are still bumping close to the bottom. We hit about 38M barrels a day of demand loss, and are currently sitting at about 30m barrel a day of loss. Now some will point to- look at how “little” we have built in oil storage- it should be WAY worse. These are the individuals that ignore the refining and petchem complex and don’t appreciate the oversupply up and down the supply chain. Refining utilization will struggle to normalize due to the large oversupply across the refined product space, and the slow return of demand. China quickly got refiners up to speed and are now being forced to slow down activity as they have further oversaturated the market.
The next “bullish” stance is that some OPEC+ nations are cutting production “ahead” of the May 1st agreement start date. This is not a choice but being forced on them as demand has collapsed. More shipments are being left at see with KSA struggling to find a home for a large swath of their crude slate. China and the U.S. have all canceled shipments for delivery in May, while China has increased some spot purchases from Russia- it isn’t enough to bridge the gap. We had a slew of economic data the past three days (more on that below) and each economy reaches new record lows… as in ALL-TIME WORST EVER. It is important to consider where we are going to have to “bounce” from. The depths in which we have fallen is driven by the fact the global economy was already slowing, and the need for extreme measures to stem the spread of COVD-19.

U.S. Remains Flooded with Crude- June to Go Negative

The production in the U.S. remains well above where it should be as shut-ins are slow to be rationalized even as completion crews crash through 100. New completion activity has quickly dropped off, but shut-ins have been slow to materialize across the sector. Frac spreads will quickly fall below 100 (most likely this week), but the pace won’t abate until we start to approach 50 or so spreads. We have average about 28 spreads declining each week since March 13th as we fell from 298 to last weeks 147. This week will come in somewhere between 97-103. The slow reaction is overwhelming Cushing but is also getting stuck at the coast as export demand falls along side refiner slowdowns. In PADD 3 (Gulf Coast) refinery runs are down to 7.1M barrels a day with more reductions already being talked about. The area still has about 156M barrels of oil storage but is reaching the breaking point for gasoline storage with distillate builds rising quickly. The below charts give a breakdown of how bad the storage situation is throughout the region, and refinery utilization rates are quickly responding with more announcing additional cuts. “Shell is reducing operations at its Convent and Norco refineries in south Louisiana and at its Saraland facility in Alabama on low demand, person familiar with operations says.

  • The 211.3k b/d Convent refinery has shut the 100k b/d VPS-2, the smaller of two crude units, which reduces rates by about 47%
  • The 91.6k b/d Saraland facility has shut its sole crude unit
    • Saraland processes foreign and domestic crudes to produce heavy olefin feed and also liquid petroleum gases, gasoline and kerosene, according to co. website

These are examples of new reductions that will be reflected in next week’s EIA numbers- with more announcements soon to follow. I have confidence in these additional run-cuts due to the massive builds across refined product storage. Gasoline demand has stabilized for now, but the RECORD build in blend stocks highlights just how bad demand has been and will remain over the coming weeks. Blend stocks, which are octane boosters to create the gasoline values we see at the pump- 87/89/91/93 typically trade at a premium and a coveted asset. Typically, Europe will ship gasoline into PADD 1, but due to the glut there are less shipments coming in and will fall below the 2017 lows. “So far in April, only 31 tankers hauling about 1.2m tons — mostly gasoline or blending components — are expected to sail on the transatlantic route — fixture reports and vessel-tracking data compiled by Bloomberg show.” These shipments will mostly likely get diverted or float offshore and be used as some form of storage in the near term.

PADD1 Refinery Gasoline Storage- Seasonally Adjusted Over the Last 29 Years

PADD 3 Refinery Utilization Rate- Seasonally Adjusted Over the Last 20 Years

PADD 3 Gasoline Storage- Seasonally Adjusted Over the Last 20 Years

PADD 3 Distillate Storage- Seasonally Adjusted Over the Last 20 Years

DOE Blending Components Seasonally Adjusted at All-Time Highs

PADD 3 and EIA Data Coming into Greater Focus as Tank Tops Getting Hit

PADD 3 is in focus due to the avenues into the floating market, and the dumping ground for a huge chunk of U.S. oil production. U.S. production remains well above where it should be given the fact that physical spot prices have been hovering below $15 for clear over a month now. There are several reasons why the realized prices will continue to struggle over the next several months:

  • The massive glut of refined products will push refiners to remain at well below seasonal run rates pushing more U.S. crude into storage.
  • The poor quality and high gasoline cut of U.S. crude will push refiners to keep purchasing seaborne cargoes to make a “heavier” cut of products.
  • The poor demand across the U.S. will remain throughout the remainder of the year. The flare up of COVID cases will keep the economy depressed, and the slow pace of consumer activity will keep the demand for diesel/ gasoline/ jet fuel well off seasonal norms.
  • The weak demand in the global market will keep U.S. crude stuck on our shores, as well as the low demand for U.S. refined products
    • China is pushing as much product into Europe and other U.S. markets limiting our ability to export refined products. “European imports of clean products from East Asia — mostly middle distillates — are set to rise to their highest since at least the start of 2018 in April, according to ship-tracking data, tanker fixtures and port reports compiled by Bloomberg.”
    • The Middle East is also sending a large shipment of refined products into Europe. “European imports of Middle Eastern oil products are set to jump in April from the lows seen in the previous two months. Several ships are floating mid-voyage, while a Suezmax hauling ULSD is en route.”

European Jet Fuel Contango Structure Will Remain Terrible as Lockdowns are Extended

  • All of these shipments will displace distillate coming out of the U.S. and cause distillate stockpiles to shift higher- especially as refiners have adjusted processing and crude slates to maximize distillate output and minimize gasoline/ aromatics. The distillate chart above highlights how quickly things can change when demand remains a huge overhang.
  • Even though there is a quoted: 156M of oil capacity available in PADD 3- a huge chunk has been preserved for the KSA crude heading our way- 50.4M barrels in 24 vessels headed to the US from Saudi Arabia for arrival in May.[1] The crude will start arriving around May 1st, and will continue throughout the first 2 weeks of the month.
  • The flood of KSA crude will push EVEN MORE U.S. crude into Cushing or force prices at the coast below zero. Coastal crude will have to find a clearing price, and as shipping rates explode- U.S. crude will have to trade down to account for those additional premiums. For example, if Magellan East trades for say $-3- it just means the customer paid zero for the oil and just covered shipping. There are other intricate components to that transaction, but this is just a high-level example to consider.
  • U.S. crude is geographically the furthest for most potential customers and is of lower quality vs other types of crude options in the market. The steep discount for Middle East crude into Asia will keep U.S. oil from flowing into Asia. China WILL NOT abide by the trade deal, because China only honors a contract while it is firmly in their favor. There is also awfully specific language surrounding pandemics and other “Acts of God” that will keep them from having to fulfill the agreement and actually start a “new” round of negotiations.
  • Global demand for oil will remain under significant pressure even as some of the lockdowns start to loosen allowing for some normalizing in driving and movement of goods. The pain from abysmal economic data/ unemployment/ consumer debt/ fear of infection will keep companies from hiring and consumers from spending on discretionary goods.

Distillate Exports from the U.S. Over the Last 29 years- They Will Make New Lows

DOE Motor Gasoline Demand- Just Because it Bottomed Doesn’t Mean Growth. It Just Means Stabilized

DOE Distillate Demand- Has Seen Some Recovery but the Large and Sustainable Drop in Exports Will Offset

U.S. WTI June Futures Heading to $-3 and Brent to $7: Break Down of U.S. Tank Space

The current U.S. backdrop will lead to June and July WTI Cushing future contracts to go negative as Cushing tank tops become a reality. The pain across the WTI curve will also drag Brent lower and pull it into the low single digits. The recovery in pricing over the last few days is driven by financial instruments, as the fundamentals continue to deteriorate across oil and the underlying product. The problem with a whole supply chain seizing up is- refined product will have to clear before we get any meaningful movement in refiner activity. The issues will persist as now Spain, Italy, and France all reported an uptick in new virus cases. “Italy and France both reported the most new cases in four days, complicating efforts to gradually ease containment measures. In Spain, where the daily case count was mostly steady, lawmakers extended a state of emergency to May 9. The three countries together had more than 10,000 new cases on Wednesday, bringing their combined total to almost 600,000. They’re preparing to cautiously lift restrictions starting next month, following the examples of nations including Denmark and Austria.” This also comes on the back of Singapore/ Japan extending their own lockdowns due to spreads within the country. South Korea continues to grapple with their own outbreaks, as China experiences the beginning of Wave 2 appearing in Harbin (Capital City of Heilongjiang), Guangzhou (capital of Guangdong), Wuhan, and Beijing. This has caused some business and local areas to be shut-down to mitigate another resurgence of COVID-19. India remains locked in their own battle against COVID, but some nationwide restrictions have started to ease even though testing remains lackluster across the country. On a positive note- Vietnam will lift most of their social distancing protocols as new cases fell in the area. These global issues will keep product/crude trapped in the U.S. and without meaningful shut-ins (2M barrels worth) the pace of builds will continue and prices will go negative.

  • Oil (sum of working Capacity and Stocks in Transit) is 777.2M
  • Cushing is 76M barrels and currently sits at 59.7M= about 16.7M barrels of spare capacity
  • Oil (Strategic Petroleum Reserve- SPR) is 797M barrels (currently about 713.5M operational)- ending stock of SPR is 643.885M- spare capacity = 69.615M barrels
  • Oil: Tank and Underground Net Available Shell Storage Capacity is 615.387M vs current 518.6M = 96.787M available storage
  • Gasoline: 361.57M storage available vs 263.2M = 98.37M of available
  • Distillate Fuel Oil: 212.889M vs 136.9M = 75.989M
  • Jet Fuel= 62.595M vs 40.8M = 21.795M

The above data points are just estimates to get an idea of how much space is available. The numbers can vary as space can be reserved for purchased barrels that haven’t appeared or some of the builds can be registered but stored offshore and not in an onshore tank.

China Refined Product Exports Surge into a Massive Oversupply

China has now posted March numbers for gasoline and diesel exports, and “shockingly” there was a large increase across the board. It is important to remember that last year was a record year for product exports, so setting new records during a HUGE product oversupply is just adding to the problem. The fact China is able to outpace last years export so far by this margin shows three key things:

  1. They have TERRIBLE local demand and is slating a huge chunk for the export market
  2. China is tight on local storage.
  3. Refiners are getting back to normal operation- not to supply the domestic market, but take market share in the global market
  • China March Gasoline Exports 1.82M Tons, +8.2% Y/y
    • Gasoline exports year-to-date rose 21% y/y to 4.55m tons
  • March diesel exports 2.83m tons, +4.3% y/y
    • YTD diesel exports rose 3.9% y/y to 6.3m tons

The below chart puts into context the rise in shipments into the global market. Export margins have been slashed due to the oversupply, which will result in a drop in shipments in the end of April and well into June at this point.

Refinery capacity in China is technically at 17.2M barrels a day, but reached something closer to 13.78M a day in Dec. Jan and Feb of 2020 China averaged about 12.12M barrels a day, but fell much further and closer to 7M barrels a day at the height of the COVID lockdown. The shift to 7M barrels a day was equivalent to capacity in 2003 to give a breakdown of how things slowed down. China has been focusing on building a dominance under the Made in China 2025 (which really expands to 2045), which has driven the extensive buildout of both refining and petchem capacity. There is slated to be another 3.1% of refining capacity added in 2020, but even though the numbers of total throughput are impressive- China averages about 76% utilization rate across its system. The goal has been to build out more state-owned assets, and push Teapots (independent refiners) to shut-down but that is much easier said than done. This just highlights that China has overcapacity already, and the current backdrop of a COVID-19 pandemic creates an even bigger glut. To highlight the oversupply- “The total profit for China’s petroleum and chemical industry, which also includes fertilisers and other sectors, was 668.37 billion yuan ($95.9 billion) in 2019, down 14.9% from 2018 level, according to CPCIF.”[2]

China has been aggressive in trying to take market share, but the growing oversupply globally across refined products and crude will reverberate through the system. The below activity levels have accelerated over the last 3 weeks, but the glut being experienced is going to force the pace of the reactivations to slow. The CCP was hoping to get back to about 75% for the state-owned assets, but the slow pick-up in domestic demand has derailed many of these plans. China has already sent a huge chunk of product into international markets, and key storage areas are already reaching record levels- such as Singapore.

State Owned Refinery Run Rates Broken Down by Region

TeaPot Refinery Run Rates Broken Down by Processing Unit

Singapore Oil Products Stock Data Reaches a New Record

The above chart helps drive home the issue the market will face trying to clear out refined product stocks. Singapore fills will accelerate over the next 2 weeks as Chinese product can’t find a home, and refiners slowly ramp down utilization rates. Asia storage- specifically India/ Singapore/ China are reaching peaks means crude purchase are going to have to slow and refinery runs will have to be cut back. “Already, much of the region’s storage capacity outside China is either nearing capacity, as in India, or is booked and unavailable for new flows. This means that many refiners in the region will have no option but to cut throughput, and in turn reduce crude purchases, no matter how cheap oil eventually becomes.” “With the region’s number two importer India still under lockdown and increasing problems in third-ranked Japan with containing the spread of the new coronavirus, it’s likely that Asia’s demand for crude imports will stagger in coming months.”[3] The issue in India is growing dire, which is why “INDIA MARCH OIL PROCESSING BY REFINERIES 21.2M TONS, -5.7% Y/Y.” Demand for diesel and gasoline, which account for more than half of India’s oil consumption, fell more than 60% in the first half of April from a year earlier, according to provisional sales data from three state-run fuel retailers. Prime Minister Narendra Modi extended the world’s biggest lockdown to 40 days from an initial 21. The stay-at-home order, which has been extended through May 3, has emptied roads, halted commercial flights and brought most economic activities to a halt. “April demand is expected to be lower by 50% than usual demand,” said M. Venkatesh, managing director of Mangalore Refinery and Petrochemicals Ltd. May oil consumption in India should be better than April, by at least 50%-60%.” I strongly disagree with the statement as we have seen how difficult it is to restart an economy, and the longer-term impact that is created on refined product demand. It will result in more exports- but that market is already experiencing a massive glut. India will see a much bigger drop off even in oil purchases as tank tops are getting close across the area. Another problem- is the lockdown in Japan that is also hurting regional demand as the 2nd and 3rd largest economies in the world struggle amid the weight of COVID-19.

Price War Continues Away from the Screens

These key issues are the reason I believe Brent futures will succumb to the gravity of oversupply. OPEC+ nations have engaged in a physical oil pricing war- away from the screens. OPEC+ made a nominal agreement (aka useless) to appease politicians around the world, but engaged in a price war that many don’t pay attention to- or at least not until WTI Cushing went negative for the first time ever. The little talked about but hugely important Official Selling Prices (OSPs) from the Middle East highlight the drive to gain market share in Asia. It is important to appreciate the way prices work in the physical market, which trades about 6 weeks out- so April 17th means you are finishing May and building your book for June. This means that the OPEC+ deal (as stated in their official press release because it is lower on realistic terms)

  • May- June: Cut production by 9.7M barrels a day
  • July – Dec: Cut production by 7.7M barrels a day
  • Jan ‘21- April ’22: Cut production by 5.8M barrels a day

The cut in May and June was based on Oct 2018 levels (except for KSA and Russia) with the average cut being 23% across the board. The problem is- the books outstanding for May remain WELL above the stated targets. Based on the Angola bookings in May, they have cut by 7% and not the agreed upon 23%. Angola was initially supposed to sell 25 in May, which was reduced to 43, and now June is set with 42 cargoes being actively marketed. Many of these shipments are going into China, which I will touch on in the next paragraph. This gets to the crux of my statement earlier- production isn’t the same thing as exports. A country can “agree” to a production number, but due to low demand locally and the elevated level of crude in their storage- countries can still maintain oil exports at elevated levels.

Many (if not all) of the OPEC nations have slashed and/or shuttered refining capacity slating more oil for export maintaining oil destined for the waterborne market even as production is potentially curbed. The price war continues into Asia with each nation slashing prices:

  • Saudi is now $7.40 below Oman/Dubai pricing
  • Iraq- $8.30 below Oman-Dubai (largest Discount ever on record)
  • Iran- $7.50 vs Oman-Dubai
  • Kuwait- $7.80 vs Oman-Dubai

The fact this competition exists in the market highlights how aggressive each nation is trying to maintain and gain market share. China is the only place where refining activity has started to recover, but even that is falling under the weight of oversupply. There are now over 120M barrels of oil floating in offshore storage, and exports will have to be cut by OPEC+ nations. Angola has been the only successful country to maintain exports (only dipped by about 7%), and it is due to: 1) smaller quantity to sell 2) quality of the crude 3) included in the Chinese oil futures market. The below chart highlights how there hasn’t been ANY meaningful decline in exports over the last several months. Russia has increased exports as local demand for crude has fallen through a floor. This comes at a time when many OPEC+ countries may be cutting production but have the same- if not more- crude slated for the export market.

Exports from Angola/ Nigeria/ Russia/ Norway

The question some have asked: Why would Russia come back to the table in April after walking away earlier in the year. The below chart showing Russian interest rates is the key reason- the country needed to raise debt, but could never afford to do it at 8%. So… why not come back to the table and make some arbitrary deal and get your interest rate 2% to print some more affordable debt. “The Finance Ministry sold 86.7 billion rubles ($1.14 billion) of bonds due 2025 on Wednesday, the largest issuance for a single maturity since May. Investors offered to buy 141 billion rubles. The auction cutoff price was 6.01%, or 10 basis points below Tuesday’s closing price.” There is a limit to the amount investors are willing to accept, and a second issuance was canceled but not before Russia raised $1.14B. This will give Russia some running room, and Saudi will be able to survive the down move- but the same can’t be said about Nigeria/ Iraq among others. Nigeria has already gone to China asking for interest payment holidays and another IMF loan (The World Bank and IMF are already top 2 creditors to Nigeria).

Russia will also benefit from a rise in naphtha demand over the next several weeks- as they were amendment condensate was excluded from the deal. Demand has recovered a bi in Asia, and with refiners at depressed utilization rates- there is some premium in Asian olefins. This benefit will be short lived as margins are terrible in Europe and U.S, and each company would be happy to send flow to an area with a positive margin. This means that between exports of condensate and olefins- the arb will collapse quickly and be short lived. U.S. chemical margins remain at record low levels- so even if the global economy starts to normalize- it will take several quarters to even remotely work through inventory and get to normalized margins. This market was already struggling with overcapacity and softening demand- another instances of jet fuel dumped on a raging forest fire.

Crude and Product Glut to Continue as the Terrible Economic Backdrop Comes to Light

The crude market is already saturated as onshore and offshore storage fills up, and refined products are reaching the point of bursting. The reactivation of the global economy would be helpful, but as we have seen with China- it is slow and arduous. “India’s electricity usage actually fell at the start of this week as it began a phased reopening. That offers fresh evidence that the recovery from the pandemic is likely to be slow and painful, rather than the rapid and comprehensive snap back signaled by the rebound in global equities.” This also comes at a time that “Shockingly” economic data remains abysmal- we can look at PMI/ unemployment/ manufacturing/ exports-imports and it will tell the same story- but below are just some examples of just “how bad.” 

“Analysts see Japan facing at least three quarters of economic contraction as the pandemic paralyzes export markets, scales back production and suppresses consumer spending. Some economists expect the economy to shrink more than 20% this quarter.” It is important to note that Japan had terrible economic data in Q4’19, so COVID 19 just added fuel to a raging fire.

Australian PMI Composite Data Reaches a Record Low

The above Euro-zone data helps drive home just how problematic the situation is across the board. It is important to highlight- that all of this data was already weakening in Q4’19 and the ECB had already launched additional supportive measures (not that they ever stopped). The French and German data is troubling as they are supposed to be the “strongest” economies in the EU, but Germany will be a great test as to how re-opening progresses. The problem will be supporting- Italy and Spain on the otherside of this through some form of joint bond offering or COVIDBonds. The Fed has continued to open up USD swap lines- now stands at 13 countries, but the bid in the market for USD remains elevated as countries sitting on HUGE chunks of USD denominated debt don’t have the balance sheet (collateral) to open “official” swap lines- this forces them into the spot market (Turkey last night for example). This upward pressure causes additional pain at the local country level, and eventually the cost of the debt will become so onerous countries and corporations will be forced to default. The speed of this process has been accelerated due to the sheer size of the debt (leverage) and lack of “naturally” acquired USD through trade. Until the coming defaults, there will remain a constant bid beneath the dollar and increase the pain for emerging markets.

U.S. Continuing Jobless Claims Seasonally Adjusted Over the Last 29 Years

U.S. Initial Jobless Claims- We Have Now Erased All Job Growth Since the Great Depression

The market believes that as the economy reopens a large part of these workers will head back to the office/factory/ general place of business. We have seen the difficulty in re-opening economies in other areas, and the U.S. will be no different. If you had to furlough 100 employees, would you bring back all 100 the moment we re-open or would it be a gradual hire? A company needs its end markets to also come back in order to afford the re-hire of many workers. I believe it will be gradual and at a painfully slow pace, and with some false starts as areas will have to go back into lockdown due to resurgence of COVID. Maybe- if all goes well- by Dec 30% of those workers are back in seats- but that leaves 70% without jobs and potential benefits getting close to expiring. This will shift spending patterns and consumer consumption as fear over employments starts to settle in, and weigh on leading economic indicators.

The focus has shifted to stimulus at all costs, which will just exacerbate the issues of debt on a global level as many countries enter into an endless cycle of central bank easing and stimulus. The issue is some countries are fully tapped out of easing capacity. China has engaged on new local government bond quotas issued by the Ministry of Finance- “The latest: On Monday, the MoF announced it will allow local governments to issue another RMB 1 trillion worth of bonds under an “advance” quota.”

More context:

  • The official annual quota is announced at annual government meetings (aka the Two Sessions) that have been postponed thanks to the COVID-19 outbreak.
  •  Until then, officials can issue advance bond quotas.
  •  As of April 15, local governments had issued RMB 1.57 trillion worth of bonds, or 85% of the previously announced advance quota.

Why the surge you ask? Because local government coffers are absolutely depleted (Reuters): 

  • “China’s fiscal revenue tumbled 26.1% in March from a year earlier…extending the previous month’s slump as the coronavirus pandemic ravaged the economy.”
  • “Fiscal revenues fell 14.3% in the first quarter from a year earlier.”[4]

These movements are happening at a precarious time as Chinese exports remain terrible and fiscal revenue is terrible. Now- you can say- of course it is weak- we have a pandemic. The problem is- China missed targets last year as well as tax cuts were used to help stimulate a slowing economy. The fact that China can never be trusted to tell the truth and THESE ARE THE LIES helps highlight how terrible the underlying data is. Another way to gage a communist regime is by looking at how it treats the populace:

“Party sets up new group to keep the peace- The Party has established a new high-level coordination group – the Safe China Construction Coordinating Small Group. The group met for the first time on Tuesday. The Politburo met on Friday (see Monday’s Tip Sheet) and likely decided to establish the group then. The new group is a clear sign that the Party is worried about social stability.

Check out the group’s top priority (Xinhua):

  • “Prevent and crack down on activities that endanger the political security of the country.”[5]

There is a growing concern of discontent in China that is driving the CCP and more importantly President Xi to reinforce who is truly in control. The movements at the party level really drive home just how bad the economic backdrop truly is- even if they lie about the economic data. China has also increased the allowance of bad debt expense at banks that are already leveraged at 35x.

The next place to turn for the coming economic collapse is Europe, where German data printed terrible economic data and the ECB now plans to accept high yield collateral. “The European Central Bank will accept some junk-rated debt as collateral for its loans to banks in a move that aims to shield the euro area’s most vulnerable economies as they face the risk of credit downgrades in the coronavirus pandemic.” This was driven by the widening spreads in Italy, as the country looks to widen its deficit in order to spur the local economy. My focus has been that a failed Sovereign auction would lead to a panic in the market, and the ECB is trying to get in front of that to ensure the “safety” of member debt. “The premium investors demand to hold 10-year Italian debt over Germany’s has widened in recent days — a sign of concern — despite the country managing a successful bond sale on Tuesday. In raising more than 110 billion euros, it reminded investors just how much it needs the cash. The spread narrowed Wednesday before the ECB decision. The U.S. Federal Reserve has said it’ll buy high-yield debt and exchange-traded funds as part of a program to support small and mid-sized businesses during the crisis, and the ECB has already set its own precedent for purchasing junk.”[6] Both the ECB and Fed have focused on riskier assets in order to ensure stability, but at a rising cost as the global economy faces a long term slowdown. These backstops only work as long as demand remains for the underlying currencies, which will come under pressure as the central banks attempt to prop up more and more debt.

Terrible Economic Data only Made Worse by Rising Food Inflation/ Crop Damage/ Shuttered Facilities

As the focus remains on weakening economies, emerging markets are struggling with Turkey again called on to depend the Lira against the dollar. Food inflation remains a key focus as some form of export restrictions exist in Russia/ Kazakhstan/ Jordan/ Turkey/ Myanmar/ Vietnam/ Thailand. This is also made worse by disruptions in supply chains causing food to rot in route or at the port. “Hoa is one of more than 100 traders in Vietnam hurt by a government measure last month to restrict shipments on concerns that global demand will spike as the coronavirus upends supply chains. While the world’s third-biggest rice exporter has since reopened some trade, hundreds of thousands of tons of spoiling rice at the country’s ports show the dangers of curbing exports.” “But concerns over the outlook for exports is only growing. National rice stockpiles, the very reason the export ban happened in the first place, have failed to grow to the state’s target levels due to a spike in domestic prices, raising speculation the government could intervene again. Low-quality rice shipments, which account for about 1/5 of total shipments, may be halted until mid-June to help build inventories.”

The U.S isn’t immune to food issues with several meat facilities halting operations due to COVID-19. “On Wednesday, Tyson said it was shutting pork facilities in Iowa and Indiana. Outbreaks have also forced closures for JBS SA in Minnesota and Colorado and Smithfield Foods Inc. in South Dakota. A Tyson plant in Columbus Junction, Iowa, has resumed some operations after an earlier halt, as has been reported for a National Beef Packing Co. facility in the state.”

The U.S. is experiencing issues across pork/chicken, which will reverberate through the system and take weeks to normalize at this point.

Another driving focus is the growing locust swarm ravaging Africa, and is now 20x larger vs the one earlier this year. “A locust plague up to 20 times larger than a wave two months earlier is threatening to devastate parts of East Africa. January and February saw the worst locust outbreak some countries had seen in 70 years, with crops and farmland ravaged across much of Kenya, Somalia and Ethiopia.”[7] The locusts are striking areas that have already been impacted by an earlier swarm, as the size grows- mixed with COVID-19 disruptions- locals don’t have the tools or pesticides to attempt to protect needed crops in the region. This will exacerbate an already problematic situation.

Quick Geo-Political Round-Up

There is finally some interesting geo-political shifts that have been missing during the shut down of the global economy.

  • The U.S. and Iran had a war of words again following Iranian fast boats harassing a US Navy vessel and the first successful launch of an Iranian military satellite. President Trump stated that he has given the U.S. Navy the ability to fire upon any fast boat acting in a provocative manner. Iran responded that they have a new anti-ship surface to surface missile that can travel 430 miles. This is a lot of saber rattling because the U.S. Navy installed intelligent gatling guns specifically meant to destroy fast boats, and the likelihood that Iran has a missile that sophisticated (or at least one that can penetrate our fleets anti-missile defenses) is unlikely.
  • The Iranian regime is attempting to stay relevant but is struggling to do so as the Iranian populace struggles under the weight of sanctions and COVID-19.
  • There is uncertainty about the health of Kim Jung Un as he was missing during last week’s Day of the Sun commemorations dedicated to the dynasty’s founder raised some alarms. The last thing China wants right now is a destabilized North Korea- so if anything is amiss- China will be sure to be involved and ensure a transition. There is nothing firm otherwise at this time.
  • General Haftar had a setback the UN backed government in Tripoli seized the city of Sorman from the LNA. It was also followed by Turkish air defense shot down a Russia made helicopter in Misrata. This has been followed with reports that the LNA have started to use a nerve agent against Tripoli forces. The accounts remain unconfirmed but match up with Russian tactics used in Syria. This is an area that can heat up quickly, but will have little to no impact on the current oversupply in crude.

China sailed its first aircraft carrier- the Liaoning and its supporting fleet through the Miyako Strait, which caused Taiwan to scramble several warships in response. This also came right after China flew several military aircraft near Taiwan airspace. China has stepped up its presence and maneuvers with The USS Teddy Roosevelt carrier group still in Guam following the COVID-19 outbreak. China is looking to increase control in Hong Kong, and while protests (globally) died down due to COVID- I can assure you the sentiment against the CCP has not. If anything- more and more people are angry at the CCP handling of the situation, and the slow reaction HK had to closing down all travel. China is a country to watch as it looks to potential lash out. More to come on Chinese backdrop.


[1] https://www.cnbc.com/video/2020/04/21/tankertrackers-even-with-global-demand-under-pressure-more-oil-is-headed-for-us-shores.html

[2] https://www.reuters.com/article/china-crude-profits/china-oil-refining-profits-plunge-42-in-2019-as-overcapacity-grows-industry-idUSL4N2AW107

[3] https://in.reuters.com/article/column-russell-oil-asia/column-is-the-wti-crude-fiasco-relevant-to-asia-not-yet-but-risks-loom-russell-idINL3N2CB11V

[4] https://mailchi.mp/dce48064e504/the-new-bottom-line-china-tip-sheet-april-21-2020?e=21cdcdff2c

[5] https://mailchi.mp/1a5cab925bce/safe-china-china-tip-sheet-april-22-2020?e=21cdcdff2c

[6] https://www.bloomberg.com/news/articles/2020-04-22/ecb-to-accept-some-junk-rated-debt-as-collateral-for-bank-loans?sref=61mHmpU4

[7] https://www.independent.co.uk/news/world/africa/locust-plague-africa-somalia-kenya-ethiopia-east-africa-a9460816.html

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