INDUSTRY NEWS

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One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make things like:

Solvents Upholstery
Dresses Motorcycle Helmet Curtains Dashboards Percolators

Tool Racks Umbrellas Denture Adhesive Tennis Rackets Water Pipes Guitar Strings Clothes Vaporizers Enamel

Dentures Fan Belts

Diesel fuel Sweaters
Tires
Caulking
Food Preservatives Cortisone

Life Jackets
Car Battery Cases Yarn
Linoleum
Rubber Cement Hand Lotion Luggage Toothbrushes Balloons
Pillows
Model Cars
Car Enamel

Motor Oil
Boats
Golf Bags Petroleum Jelly Basketballs Deodorant Rubbing Alcohol Epoxy

Fertilizers
Ice Cube Trays Fishing Boots Roller Skates Aspirin
Ice Chests
Sun Glasses Dishes
Folding Doors Shaving Cream

Bearing Grease Insecticides Perfumes Transparent Tape Soap

Shoelace Aglets Linings
Paint
Hair Coloring Synthetic Rubber Dice

Surf Boards Safety Glasses Footballs Tents Cameras

Hair Curlers Ammonia

Ink

Floor Wax

Ballpoint Pens

Football Cleats

Bicycle Tires

Sports Car Bodies

Nail Polish

Fishing lures

Cassettes

Dishwasher parts

Tool Boxes

Shoe Polish

CD Player

Faucet Washers

Antiseptics

Clothesline

Vitamin Capsules

Antihistamines

Purses

Shoes

Putty

Dyes

Panty Hose

Refrigerant

Skis

TV Cabinets

Shag Rugs

Electrician’s Tape

Mops

Slacks

Insect Repellent

Oil Filters

Roofing

Toilet Seats

Fishing Rods

Lipstick

Speakers

Plastic Wood

Electric Blankets

Glycerin

Nylon Rope

Candles

Trash Bags

House Paint

Shampoo

Wheels

Paint Rollers

Shower Curtains

Antifreeze

Football Helmets

Awnings

Eyeglasses

Combs

CD’s & DVD’s

Paint Brushes

Detergents

Heart Valves

Crayons

Parachutes

Telephones

Anesthetics

Artificial Turf

Artificial limbs

Bandages

Cold cream

Movie film

Soft Contact lenses

Drinking Cups

Refrigerators

Golf Balls

Toothpaste

Gasoline

Americans consume petroleum products at a rate of three-and-a-half gallons of oil and more than 250 cubic feet of natural gas per day each. However, as shown here petroleum is not just used for fuel.

Matthew Fox

night, analysts at Goldman

Sachs listed five reasons

investors should add exposure

to energy stocks following

oil's historic plunge into

negative territory.

• Goldman said it thinks that

energy fundamentals have bottomed and that there is potential for a lasting recovery depending on the pace of the demand rebound.

• The risk behind the call, the analysts noted, is a much slower oil-demand recovery, which would likely happen if the coronavirus pandemic lingers longer than expected

Goldman Sachs thinks now is the time for investors to add exposure

to energy stocks following oil's historic plunge into negative territory

last week.
The investment bank gave five reasons in a note published Monday

night.

Goldman thinks energy fundamentals have bottomed and sees potential for a lasting recovery in energy stocks depending on the pace of the rebound in demand for oil.

The main risk related to the call, according to the analysts, is a much slower oil-demand recovery, which could be exacerbated if the coronavirus pandemic lingers longer than investors expect.

Here are the five reasons Goldman Sachs is bullish on energy stocks.

1. "Oil prices are at/below cash costs."

West Texas Intermediate oil is below the $20- to $25-per-barrel prices often seen as "typical cash cost floors." Goldman thinks the current

low prices and even the negative oil prices seen last week are warranted because of the level of oversupply in oil markets. At the same time, these ultra-low prices should force a reduction in production, thus reducing supply and helping put a floor in oil prices.

2. "Shut-in announcements are becoming material."

"The combination of OPEC+ supply cut and US/Canada shut-ins should reduce the need for prolonged low shale activity needed to rebalance oil prices," Goldman said.

3. "Demand appears to be at a trough."

Goldman expects global demand in oil to improve off trough levels before the end of the quarter and "gradually recover over the next two years." Goldman's commodities-research team sees a transition from building oil inventories to drawing on oil inventories by June.

4. "Valuation near 25-year lows on EV/gross cash invested basis."

"E&P stocks are trading near $0.50 cents on the dollar per dollar invested adjusted for longer-term degradation in corporate returns — this is slightly above troughs seen since 1995," Goldman said.

5. "Stocks on average have stopped falling on recent bad micro news."

Between dividend cuts, production shut-ins, and lower front-month oil prices, oil stocks no longer appear to be harmed by the poor headlines coming out of the oil industry. Goldman said that "as producer announcements shift from capex/dividend cuts to shut-ins, we expect equity response to inflect more positively."

WTI oil traded down more than 3% on Tuesday morning, to $12.34 per barrel. Energy stocks, as measured by the XLE ETF, were down 40% year-to-date.

Here's a potential timeline for oil's recovery, according to the bank:

Goldman Sachs Research

https://markets.businessinsider.com/commodities/news/oil-price-buy-energy-stocks-why-goldman- lists-reasons-plunge-2020-4-1029139451#

Summary

The recent selling of OIL has largely been due to fears regarding the coronavirus – fears which are decoupled from the underlying fundamentals.

Crude market fundamentals continue to become more bullish which means that the recent selloff provides an excellent buying opportunity.

Roll yield for OIL is currently negative but with an uptrend in price emerging, we are likely to see this flip once again.

Over the last few weeks, the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) has taken a bit of a hit as global fears regarding the coronavirus have impacted the prices of commodities. In this piece, I will hone in on the fundamentals of crude oil to make the case that the recent drop in price is decoupled from economic realities and that crude will likely rally from here.

Crude Markets

When it comes to understanding the battle between supply and demand in the crude markets, a very helpful tool is the 5-year range of inventories.

As you can see in the above chart, we are currently under both the 5-year average as well as 2019’s figures in overall stocks. The reason why this matters is that it indicates that at present, the balance is indicating that demand is surpassing available supply.

If you’ve listened to any headlines regarding the oil markets, then this last statement probably comes as a shock. And for good reason: the actual level of refining demand has been fairly poor for some time now with much of last year’s utilization under the 5-year average.

However, what is important to realize about balancing the crude market is that demand in isolation is meaningless. To generate a comprehensive view, we need to look at all 4 components of supply and demand to get an idea of what is driving market fundamentals.

For example, even though refining demand is poor, exports (another form of demand) remain robust and have grown consistently since legalization in late 2015.

So when we examine total demand, we can generally say that it’s neutral since weakness in refining is offset by growing exports (more than offset in my opinion, but I’ll give the bears the benefit of the doubt here).

But when we flip over to supply, we rapidly see

very bullish elements entering the picture. First off, it is true that production continues to grow,

which is another of the bear’s arguments.

However, what is overlooked in a chart like the one above is that the rate of growth is actually slowing.

And when you dig further into the data, you’ll find that this slowdown in production growth is broad-based in basically every region.

This is where things start becoming quite bullish. You see, the reason why slowing production growth is a big deal is that demand

itself continues to grow. In other words, you must have growing supply or demand will almost certainly outpace it and crude prices will rise while inventories fall.

The issue becomes even more bullish when you look at the data to understand exactly what’s happening. Essentially, we are seeing drilling activity slow.

And the reason why this activity is slowing has to do with capital discipline as well as bankruptcies of several operators.

Situations like this are really only resolved by

higher crude prices in the long run since higher prices equate directly to

higher revenues for those in E&P. In other words, this downwards trend of production grow and drilling activity is almost certainly going to continue until the price of crude rises. And as long as the trend continues, the greater the chances of crude rallying due to tighter balances.

And the second supply variable remains quite bullish: imports. Imports have been decimated due to ongoing OPEC cuts.

I have a lot of charts that make the case that overall imports into the United States are very poor right now due to OPEC’s actions, but the above chart conveys it

with a good degree of clarity.

The basic problem here

is that frankly, OPEC wants higher prices. And OPEC has demonstrated through several different cuts over the past few years that it has the will and resolve to get higher prices. At present, we are trading around the level of OPEC’s cuts which went into effect at the beginning

of 2019 and have been deepened and extended through today. Given that we’re still around these levels, I believe that OPEC will act to prop up the market once again at is meeting in early March. When OPEC acts, the market tightens due to less supply and the price of crude generally will trend higher as a result.

It’s a great time to buy the OIL ETN because the underlying fundamentals beyond strictly refining demand are uniformly bullish. This underlying fundamental picture is what I believe the recent wave of sellers in crude oil have missed. As these fundamentals continue to play out, I believe that OIL will trade higher.

Understanding OIL

Let’s take a quick pause to understand what exactly the OIL ETN is. Put simply, it is an exchange traded note which tracks the GSCI crude index. I’ve said this before in other places, but my basic qualms with the GSCI crude index is that it bills itself as a global crude benchmark when it’s really just holding two highly correlated instruments. But on the flip side, it does benefit on the roll yield front in that by having holdings across two futures curves, market structure exposure is diversified. Let’s break this down a bit more.

There’s a basic tendency in futures markets for prices along a forward curve to move towards the spot price of the commodity. This means that when futures are in contango (front cheaper than back), futures will generally be falling towards the front of the curve. Conversely, a curve in backwardation (front over back) will see prices along the curve move up in value towards the front of the curve.

In general, WTI futures typically see contango in most time periods in the front two contracts. Conversely, Brent has seen healthy backwardation in recent quarters due to its direct-competitive nature with OPEC barrels since it also is a waterborne barrel. What this means for holdings in OIL is that roll yield of the overall instrument has (over the past few quarters) been generally to strongly positive which means that investors in the note have benefited from this effect.

At present, roll yield is negative due to moderate contango in Brent and WTI, but I believe that as the market continues to tighten and prices rise, we will see roll yield become positive once again, further benefiting holdings.

Conclusion

The recent selling of OIL has largely been due to fears regarding the coronavirus – fears which are decoupled from the underlying fundamentals. Crude market fundamentals continue to become more bullish which means that the recent selloff provides an excellent buying opportunity. Roll yield for OIL is currently negative but with an uptrend in price emerging, we

are likely to see this flip once again.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.