By: Bill Spencer — January 5, 2020
Small-Cap Sunday - How We'll Clean Up Playing This "Clean Product" Market (Part 1)
I hope your new year is off to a great start.
Have you made your list of New Year's resolutions?
If so, I want you to add one more item: "In 2020 I resolve to keep an eye on the Clean Product tanker industry".
As we fish for profits over the coming year one place we'll be casting our net is... out at sea.
Currently, the world ships 90% of its goods by sea. So as an industry, shipping is worth $700 billion dollars and will grow to be worth more than $1.3 trillion by 2023.
A huge segment of that industry consists of "clean product" tankers, vessels that move refined oil products -- diesel fuel, gasoline, jet fuel -- from refineries to places where those products get distributed and consumed.
The tanker industry (which is made up of many small-cap companies) is just now coming out of a ten-year bear market.
I spoke with one shipping CEO shortly before Christmas (I won't reveal his name here because I just wrote about him and his company in my paid Founder's Forecast service.)
He told me that "In my career, the proper bull markets in tankers have been 1985-1990... and 2003-end of 2008 early 2009...
"That’s where you get these multi-year, really big cash flow events. They come on the back of years of hell beforehand. So right now we have a situation where the market was fundamentally in a bear market from 2009, and that’s a necessary step to creating a bull market."
Right now the supply-demand balance has been reset in a way that favors a handful of tanker firms.
For one thing, demand for refined fuels is growing exponentially.
In 2003 refined oil product exports were 12 million barrels per day. Today that number is up to 23 million – almost double.
One Senior VP and Senior Analyst at a large shipping company told me, "What’s also important is the lack of development in certain places. Latin America’s got growing consumption, but they’ve only got 75,000 barrels of refining capacity planned over the next 5 years, which isn’t enough to meet their demand. They’ll have to get refined product from someplace".
"We also haven’t seen a lot of refining capacity in places like Europe."
They'll import that growing amount of fuel using product tankers.
Also, according to the U.S. Energy Department, "The United States becomes a net energy exporter in 2020 and remains so [until 2050]".
That's a huge demand driver in the tanker industry.
As with any market disruption there will be winners and losers.
For example, this past Wednesday, January 1st, a new regulation took effect that promises to have certain product tanker companies popping champagne non-stop.
Called IMO 2020,the new rule caps the amount of sulfur seagoing vessels may emit from the fuel they burn. The old limit was 3.5% sulfur. The new limit is 0.5%.
This regulation will affect more than 70,000 vessels including every cruise ship, container vessel and oil tanker that sails the seas.
Companies will have to either start using cleaner, more expensive fuel or they'll have to install "scrubbers" that remove the excess sulfur from a ship's emissions.
Firms that have already installed scrubbers have a huge competitive advantage. For one thing, there's a limited supply of the new, low-sulfur fuel. Any ship without a scrubber that cannot acquire the new fuel will not be allowed to carry product.
That means the supply of compliant ships will be low at the exact time the demand for refined product shipping is growing. Bottom line? The ships that are able to service this higher demand are going to clean up, because they'll essentially be able to charge whatever they want to ship product.
A senior analyst told me, "Our business is very similar to Uber. We operate in a spot market. When you leave Madison Square Garden on New Year’s Eve, and it’s raining – if you order an Uber you hit surge pricing”.
Rates for some firms have already surged five-fold to ten-fold. And almost all of that extra revenue accrues to the bottom line.
Next week I'll have some ways for us to play this development. For now I just want you to know what's going on.
It won't hurt to wait a bit before pulling the trigger. The market, while strong in the long term, is overbought in the short term. Any coming selloff would present an opportunity to buy into stocks or ETFs at a discount.
Here's a point-and-figure (P&F) view of the New York Stock Exchange BPI (NYSE BPI).
The chart is in an X column (showing shorter-term strength)... And it's on a P&F "buy" signal -- showing longer-term strength.
(Click any image to enlarge)
The NYSE BPI displays the percentage of stocks trading on the New York Stock Exchange currently on (point and figure) buy signals.
(By the way... this indicator is so important we've devoted an entire website to tracking its moves. You should check it frequently and read through the detailed commentary.)
For a stock to go on a buy signal, it would have to break above a key resistance level on its price chart. For that to happen there would need to be a tremendous amount of buying taking place, the kind you only see when large institutions are loading up on the stock.
Right now the NYSE BPI is at 59.85. That means that 1,675 of the 2,800 stocks that trade on the NYSE are on buy signals.
The yellow highlighted boxes show how far the chart would have to advance before reaching the 70% level where the market would be considered overbought in the longer-term.
A moment ago I said the market was overbought over the short-term.
While the NYSE BPI has a ways to go before it reaches overbought at 70%, there's another indicator called the NYSE %30-Week which moves faster than the NYSE BPI.
This indicator shows the percentage of stock on the NYSE currently trading above their respective 30-Week (150 Day) moving averages.
At 72.47 this shorter-term oriented indictor is flashing "overbought".
Here's another reason I say the market is overbought in the short term.
This screen capture shows the US Industry Bell Curve, one of the premium tools that come bundled with our Sector Prophets Pro data program.
This indicator lets you see at a glance which of the 45 market sectors currently have demand in control over the short-term (blue boxes) and which have supply in control over the short-term (red boxes).
Demand is in control of a sector when its P&F chart is in a column of X's
As you can see, right now demand is in control of 42 sectors -- 93%. When institutions take positions, they spread their capital around entire sectors. Right now we're seeing tremendous demand (buying) in most sectors.
With so much capital having already been spent by institutions, there's less available for additional buying. The force that drives prices higher grows weaker.
Contrast the Bell Curve above to one from just a month ago.
At that time short-term demand controlled 71% of sectors. Also notice that on December 27 sectors were on the left side of the 50% line. That means most sectors had fewer than 50% of their stocks on buy signals.
Today the picture is reversed. Fully 27 sectors now fall to the right of the 50% line meaning that most sectors have more than 50% of their stocks on buy signals.
It's worth repeating, any coming market selloff is less a cause for concern and more an opportunity to acquire attractive assets on the cheap.
And in the coming 12-18 months I expect we'll be heading out to sea to fish for oversized returns.
Next week we'll dive into the sectors that should be impacted by developments in the tanker industry. And we'll look at how we can begin playing this market.
If you want to jump into new opportunities throughout the market sooner, on Thursday, January 9th, we’re opening the doors to a select number of new members in COstas Bocelli's Profit Skimmer service.
To learn more about Costas' highly effective trading strategy, the seasonal forces at play that will drive the markets in 2020 click here now.
To a prosperous 2020!
See you soon,
Editor-in-Chief, True Market Insider