Oil Price Swings $9 Daily as Saudi Cuts, Hormuz Crisis Collide

Brent crude oil prices rose toward $97.72 per barrel, and WTI prices rose above $99, even though the price of crude oil had dropped 12% in a week, which was the biggest drop since June. The recovery is not hope. It's math.

Attacks on Saudi Arabia's infrastructure just cut production by 600,000 barrels per day. Meanwhile, Iran keeps the Strait of Hormuz closed, which stops a fifth of the world's oil and LNG flows.

The markets are torn between the risk that peace will actually be achieved and the short-term damage to supply caused by the chaos in the Middle East. As of this weekend, talks between the US and Iran began in Islamabad, with Vice President J.D. Vance in charge. The price of oil could drop another 10% if they can come up with an outline deal. Triple-digit crude becomes the base case if they fall.

It's not the direction that shocks me; it's the $9 average daily price changes since the war began. It's not a market. That is a coin flip with a $1 billion bet.

Saudi's East-West Pipeline Problem Changes the Supply Equation

Attacks reduced production capacity by 600,000 bpd, or about 10% of the kingdom's typical petroleum exports, according to the press agency. Even worse, this week's strikes on the East-West pipeline reduced flow by an additional 700,000 bpd. This pipeline is important since it is part of Saudi Arabia's attempt to avoid Hormuz. When the Strait closes, the route enables Riyadh to ship crude via Red Sea facilities.

Mohith Velamala, a global oil analyst at BloombergNEF, said, "The drop in east-west pipeline throughput weakens Saudi's Hormuz bypass strategy and shows that supply risks are still present." The Saudis' Plan B turned into Plan C, and they don't have a Plan D yet.

Kuwait made things even worse by saying that it had stopped drone attacks on "vital facilities." The strikes suggest that this isn't a single act of vandalism, but rather planned damage to infrastructure that is meant to cause as much trouble as possible while still being able to deny responsibility. The markets don't like plausible deniability. Your bets can't be hedged.

Hormuz Remains the $100 Oil Variable Nobody Can Price

Within hours of Israel's intense bombings on Lebanon, Iran reopened the Strait before closing it again. Tehran's reasoning: Israel broke the terms of the truce since Hezbollah was not covered. Israel's response: The agreement did not include Hezbollah. In the meantime, Tehran publicly threatened to charge transit fees for travel through Hormuz, but Trump cautioned Iran against doing so.

"There are reports that Iran is charging fees to tankers going through the Hormuz Strait," Trump tweeted. "They better not be and, if they are, they better stop now!"

When asked what he meant by "bringing Hormuz "to a new stage," Mojtaba Khamenei, Iran's new Supreme Leader, sent a message that was intentionally unclear about what that meant. It could mean fees, closures, or something else. The market is once again paying attention to the real flows through the Strait of Hormuz, which are still not back to normal and are not likely to return quickly, said Rebecca Babin, a senior energy trader at CIBC Private Wealth.

The facts back her up. Since the end of February, problems in the Hormuz Strait have blocked about 20% of the world's oil and liquid natural gas flows. That's not just a short-term problem; it's a structural supply shock that affects bunker fuel prices, refining profits, and the energy security of Asia.

Islamabad Talks: High Stakes, Low Visibility

Reports that negotiators had arrived in Pakistan for talks over the weekend were denied by Iranian media. They said that talks would not resume until Washington "honors its commitments" on Lebanon and Israeli strikes stop. That goes against earlier signs that VP Vance was leading a US team into formal talks on April 11.

Trump seemed sure of himself in a phone chat with NBC, where he said that Iranian leaders are "much more reasonable" than public rhetoric suggests. But that's the same Trump who, on April 7, called for a two-week ceasefire, only to see it fall apart right away when Israel started bombing again and Iran closed Hormuz again.

The mechanics of diplomacy are severe. Washington wants Iran's nuclear program terminated and Hormuz opened. Tehran desires control over the river and protection for Lebanon. There has been no indication that either side is willing to back down. Netanyahu has veto authority over agreements he did not sign because Israel maintains that its Hezbollah campaign runs outside of any US-Iran framework.

Trump said that Israel was "going to low-key" strikes, but that's not the same thing as stopping them. The markets learned that lesson Thursday, when news about a ceasefire turned people's hopes for peace into new worries about supply.

Why Volatility Is Crushing Position Sizing

In the past few months, the price of crude oil has changed by more than $9 per day on average. This is the biggest daily change in years. Traders have to cut down on position sizes and holding times because they don't want to go over their risk limits. Leverage is dangerous when the price of a commodity changes by 10% during the day.

Despite Friday's uptick, both Brent and WTI ended the week down more than 10% after paring gains. The market's inability to price medium-term outcomes due to hourly changes in inputs is shown in the discrepancy between intraday strength and weekly bloodbaths.

Tighter stops and smaller volumes are used by energy desks. Because there are fewer players with less capital, there is less liquidity, which intensifies price movements when headlines decline. This exacerbates volatility. Until either supply stabilizes or demand craters, the feedback loop won't end.

What Traders Should Watch Next 72 Hours

It's all about the talks in Islamabad. If Vance and his Iranian peers come up with even a vague plan,one that includes dates for reopening Hormuz, rules for nuclear inspections, and exceptions for Lebanon, the price of oil could drop back to $85 a barrel. For a while before Hormuz closed in February, it traded there.

If, on the other hand, talks break down or attacks get worse, the $100–105 band becomes the new floor. Saudi Arabia's production cuts take away the cushion that normally absorbs the extra cost of global risk. There is no extra capacity buffer because the East-West pipeline is only moving 700,000 bpd and Hormuz is still pretty much closed.

Keep an eye on OPEC+ signs too. The gang has been surprisingly quiet during all of this trouble. If Saudi or UAE officials talk about stepping up production quickly to make up for lost capacity, that's a sign that diplomacy is failing and they're getting ready for long-term problems.

The Trading Calculus: Mean Reversion vs Structural Shortage

After a 12% weekly decrease, mean reversion trades are attractive. Friday's rebound implies some gambled on diplomacy and supply normalization. Risk-reward is unfavorable for that thesis due to the shaky ceasefire infrastructure.

Structure deficit is the alternative. If Hormuz is closed through Q2 and Saudi can't restore East-West pipeline flows, Asia faces an energy crisis. Profits would soar in refining. Diesel and jet fuel spreads exploded. It's different from peace talks betting.

Maintain tight stops, modest size, and upside tail bias. This market punishes confidence until clarity—which won't come from Islamabad this weekend. Whether tankers return to Hormuz will determine it.