Oil prices experience a 24-hour "extreme reversal"! Wall Street traders call it unprecedented...

Energy prices initially broke the $100 per barrel mark, then $110 became a thing of the past… By Monday during the Asian session midday, U.S. WTI crude oil prices once surged close to $120.

However, this wild rally, with intraday gains of up to 31%, vanished after entering the European and American trading hours, and even further declined in the Asian market on Tuesday. It was one of the most shocking reversals in modern trading history.

The “extreme rollercoaster” in oil prices over just 24 hours highlights how the US-Iran conflict is disrupting the outlook for the global energy-intensive economy. After Asian and European stock markets sold off on Monday morning, oil prices retraced most of their gains. U.S. WTI crude futures settled up only 4.3% at $94.77 per barrel.

This actually boosted the U.S. stock market—American companies are better positioned to withstand the global energy shock, and stocks continued to rebound before the close. After President Trump said, “I think this war is basically over,” the rally accelerated further.

In after-hours trading on Monday, WTI oil prices fell further to around $85 per barrel, a sharp decline of about $35 from the Monday Asian peak.

Rob Thummel, portfolio manager at energy investment firm Tortoise Capital, lamented, “In my 30 years in the industry, I’ve never seen anything like this. It’s hard to say when all this will settle down.”

Thummel added, “The world isn’t short on oil; what we need is to get the oil flowing again.”

Market data shows the Dow Jones Industrial Average reversed a decline of over a thousand points during the day, closing up 239 points, or 0.5%. The S&P 500 also rebounded sharply from its early lows, closing up 0.8%. The Nasdaq Composite rose 1.4%.

Tech stocks led the gains overnight, with Nvidia climbing 2.7%. As a barometer of the economy, equipment manufacturer Caterpillar rose 3.5%, boosting the Dow. Some investors and U.S. officials noted that recent oil price surges in financial markets have exceeded expectations for long-term physical oil supply threats.

Jim Ritterbusch, president of oil consultancy Ritterbusch & Associates, cautiously told clients, “We believe this extreme volatility indicates that the current oil price rally is far from over.”

Brazilian state oil company Petrobras CEO Magda Chambriard also said in an interview, “After the Strait of Hormuz blockade, the market went completely crazy.” Although the company imports some crude from Saudi Arabia, rising export oil prices will benefit it. Chambriard also pointed out that production cuts at high-yield oil fields along the Persian Gulf could lead to long-term supply issues.

“Shutdowns are quick, but restarting is not easy,” she emphasized.

Where does this “extreme reversal” come from?

Initially, investors attributed the pullback from Sunday night’s highs to news that several oil tankers had passed through the Strait of Hormuz heading to Asia, and speculation that the G7 might tap into strategic petroleum reserves; Trump’s comments further fueled the decline.

On Monday, G7 officials held a special meeting to discuss the possibility of releasing strategic reserves.

French Finance Minister Roland Lescure told reporters afterward, “We are prepared to take all necessary measures, including releasing strategic reserves, to stabilize the market.”

According to the U.S. Energy Information Administration, the current U.S. strategic petroleum reserve is about 415 million barrels, significantly down from a peak of 727 million barrels in the 2010s.

In 2022, to respond to the Russia-Ukraine conflict, President Biden approved an unprecedented release of strategic reserves. Since then, Washington has only made small replenishments to salt cavern storage facilities along the Gulf Coast. Nonetheless, existing inventories combined with record U.S. drilling activity could partly cushion the energy shock’s impact on the economy.

Major energy-consuming companies’ stocks also rebounded after mostly falling on Monday. Delta Air Lines, United Airlines, and American Airlines all closed higher. FedEx and most large rail and trucking companies also finished in the green.

In the U.S. bond market, the 10-year Treasury yield closed at 4.133% on Monday, roughly unchanged from last Friday.

Padhraic Garvey, head of Americas research at ING, said, “The market has signaled some concerns through rising oil prices, increased volatility, higher yields, and potentially worsening risk sentiment. For the Trump administration, a quick resolution might be more favorable than a prolonged conflict.”

Currently, traders expect the Federal Reserve to cut interest rates by 25 basis points no earlier than September. Before the U.S. attack on Iran on February 28, markets had already priced in rate cuts for July. Bond options show some traders even betting that the Fed will not cut rates at all this year.

TD Securities noted in a report, “The stagflationary tone in the market is spreading, although current asset volatility remains within manageable levels.”