What happened

Shares of Tsakos Energy Navigation (NYSE:TNP) opened the day sharply higher on April 28, rising as much as 18% early in the day. That gain quickly started to taper off, with the stock up in the low single digits by the middle of the afternoon. The sharp price gain, however, shouldn't be a surprise to anyone given the dynamics currently impacting the energy sector.

So what

The story here actually goes back at least a decade, to when U.S. oil production started a dramatic ascent. But there's no need to go back quite so far, because the big picture is fairly easy to understand. The world entered 2020 with an abundance of oil. OPEC has been trying to balance that against demand, but it hasn't been going very well. In fact, OPEC ended up in a price war with Russia that eventually pushed supply even higher before hashing out an agreement, which included the United States, to start throttling back oil production. That move was nice to see, but it came at a time when demand was sharply declining because of the worldwide efforts to curtail the spread of COVID-19.

An oil tanker docked and being filled.

Image source: Getty Images.

With supply high and demand falling as economies around the globe effectively shut down, oil has started to pile up in storage. The problem is that there's only so much oil storage in the world. Once that space is filled, companies have to get creative. That includes hiring the ships that normally transport oil, like Suezmax tankers, to be floating oil storage units. Tsakos Energy Navigation owns a large fleet of oil tankers, so it is set to benefit from the need to store all of the excess oil in the world today. Near-term earnings are likely to be pretty good.

This is because when supply and demand are out of balance like this, storage rates start to rise. So Tsakos Energy Navigation and its peers are able to charge customers an incredible amount of money for their available ships. Tsakos usually has a large portion of its fleet locked up under long-term contracts, so its ability to take advantage of the current spike in rates isn't as pronounced as that of peers that operate more ships on the spot market. This is why Tsakos Energy Navigation's shares have been rising of late but perhaps not quite as dramatically as some.

Now what

Owning oil tankers is a really good business today if you have ships to lease out. Because Tsakos Energy Navigation tries to balance its fleet between long-term contracts and spot charters, its ability to take advantage of the current dearth of storage is limited relative to some of its more aggressive peers. It will no doubt benefit financially, which is why investors are bidding the shares up, but ship owners with more spot exposure will reap greater benefits.

That said, leasing rates in this industry can change quickly and dramatically, so investors need to pay close attention. When all of the extra oil finally gets worked off, charter rates will fall, and so, too, will investor enthusiasm for tanker owners. Tsakos Energy Navigation's balanced approach will likely limit the downside at that point just like it is limiting the upside today. Investing in oil tanker stocks is not for the faint of heart, but Tsakos is one of the more conservative options in the space.