Investors have been trying to time the oil market to no avail; every bottom to date has failed to hold, leading to even lower prices. Oil is now trading at an 11-year low, and the technical outlook is still far from perfect. Mass psychology dictates that the majority of the players need to feel totally dejected before a long-term bottom is in place. The sentiment is dangerously close to trading into the zone of despair, and once it does, oil will bottom. For now, instead of focusing on this sector, there is an oil-related area that appears to have bottomed and is starting to trend upward.
This is none other than the humble the oil tanker sector. The tanker sector is witnessing utilization rates more than 80% (actually 85%), a level this entire sector has not experienced since 2009. A look at a chart of the world's largest oil tanker company, Frontline (FRO) - Get Report , reveals that the stock has bottomed and is putting in a series of higher lows; this is considered a bullish development. The stock was up roughly 20% in 2015. This stock could also be of interest to dividend and fixed-income investors as it will soon start paying a quarterly dividend. That means investors will benefit from potential capital gains and from the quarterly dividend the company is set to start paying out soon. Lastly, rates for very large crude carriers (VLCC) have surged roughly 44% over the past year, from $34,500 to $49,500 per day.
The Technical Outlook
Frontline is trading well off its 2014 lows, and if you look closely, it appears to have put in a double bottom in toward the end of 2014. There is a strong layer of resistance in the $3.20-$3.30 range, and the initial attempt to break out will most likely fail, which is the norm in such cases. A good long-term entry point would be $2.50, and a great entry point would be at $2.20 or better. As this sector is very volatile, the smart thing to do would be to take small bites as opposed to deploying one huge chunk of money in one shot. A monthly close above $3.30 should lead to a test of the $4.75-$5.00 ranges. There are two ways you can play this stock:
- Wait for a pullback to the $2.30-$2.50 area.
- Wait for a monthly close of more than $3.30 before getting in.
Although the oil sector is taking it on the chin, the oil tanker sector appears poised to trend higher. This could be just the beginning of a long upward move, and Frontline deserves a closer look as it's one of the stronger stocks in this sector.
This article was prepared by Sol Palha senior analyst at the Tactical Investor an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.