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Oil Prices: Volatility Like Never Before

All day we've been talking about the dollar as the key driver in the direction of oil prices today. As the greenback rebounded against the euro and oil fell over $4 at the lows of the session. But in the last hour and a half of trading, with the dollar still higher, oil erased most of its losses and looks poised to settle basically unchanged.

What's going on?

Yes, the market is concerned about Nigeria. Yesterday, we told viewers that Shell was extending force majeure on its Bonny Light terminal until the end of July. Today, with a strike looming among oil workers there, Nigerian union officials are saying talks with Chevron aren't going so well. Perhaps that news helped lift oil out its dollar doldrums.

Gasoline futures also turned around to gain nearly 2% on the day. There have been a number of refinery issues along the East Coast at Valero in Delaware City and Hess in Port Reading, NJ, but they didn't have a material impact on production. Perhaps traders were combining the snags reported earlier this week at Lyondell in Houston and Shell in Deer Park, IL. Also, Energy News Today is reporting: "ExxonMobil is seen requiring about 2 weeks of maintenance on a sulfur recovery unit at the 150,000- barrels-per-day Torrance, California, refinery near LA."

But the other impact on the market and the impetus for oil's whipsaw price action on a daily basis is somewhat intangible. Skittishness over proposal for more regulation on oil markets. Fear that prices at these levels could shoot for the moon... or drop like a rock. The result is unprecedented volatility.

Addison Armstrong, director of research at Tradition Energy, says fear is feeding both sides. The bulls try to push prices through $139, but when they get close they pull back. You can't be a convicted bear either because as soon as you do the market turns around.

The result, says Stephen Schork of the Schork Report, is a market that has basically traded in the same range between $131 and $139 for the better part of a week. Schork says: "All we did today was get to the bottom of the range and then after the lunchtime lull, the bids started coming in again and bears started to cover and that's taking us back to unchanged."

MF Global energy analyst Mike Fitzpatrick has been pouring over 10 years worth of data and says he can't find any time period where the volatility is even close to what we've seeing these days in the oil markets. A month or two ago, floor traders here at the NYMEX seemed stunned by $2-$3 oil price moves in a single session, now it appears $4 to $5 swings have become the new norm.

Questions? Comments? energysource@cnbc.com