What happened

Shares of Nordic American Tankers (NYSE:NAT), which owns a fleet of large oil-carrying ships (referred to as Suezmax tankers in the industry), shot higher by nearly 25% in early trading on April 28. That added to recent gains, but the massive daily increase proved temporary, as the price started to fall back by 10 a.m. That gain was "only" around 5% or so by the middle of the trading day. Although oil prices are in the doldrums, these are the salad days for Nordic American Tankers.

So what

Oil is currently facing a dramatic supply/demand imbalance. The origins of the mismatch go back a decade or so, to the days when U.S. onshore oil drilling started picking up. More oil from the U.S. upended the normal operation of the energy sector around the world. OPEC attempted to curtail supply to offset the increases, but U.S. oil simply picked up the slack OPEC created. So supply was high coming into 2020.

An oil tanker at sea

Image source: Getty Images

Then, earlier this year, OPEC and Russia ended up disagreeing over further supply cuts. The result was a price war that led to an increase in production. Supply, already an issue, rose even more, and energy prices fell. OPEC, Russia, and the United States have since gotten together to work toward supply reductions, but it was too late.

That's because the global effort to slow the spread of COVID-19 has basically led economies around the world to shut down. That, in turn, resulted in a dramatic decline in demand...at a time when the supply of oil is elevated. Oil prices have fallen to lows that have already led to bankruptcies in the oil space.

However, all of the extra oil being pumped has to be put somewhere. The first place is normally land-based storage. But when that fills up, the ships that transport oil around the world get turned into giant floating storage tanks. That's exactly what's happening right now, and it pushes the prices for leasing these ships dramatically higher. It is a good time to own Suezmax ships, like the 20 or so in Nordic American Tankers' fleet.

NAT Chart

NAT data by YCharts.

At this point, investors are expecting both huge profits and huge dividends from Nordic American Tankers, and they are bidding the shares sharply higher. Although the early gains today were dramatic before the stock started to pull back, its shares are still up nearly 80% over the past month or so.

Now what

It remains to be seen just how long the current supply/demand imbalance in the oil sector will last. It could be a long time. However, while global oil storage remains tight, Nordic American Tankers will likely continue to be called on to turn its Suezmax ships into floating storage tanks. And the profits will roll in.

That said, this situation can change just as quickly as it arose, so investors need to be very careful here. The high rates that Nordic American Tankers can charge won't last forever, and when they start falling, so too will investor enthusiasm for the stock. This is not a "set it and forget it" type of investment.