How to Play an Upside Breakout in Oil Prices

Oil Prices Are So Dependent on RussiaOil prices could be setting up for an upside break if the situation in Crimea intensifies and a military conflict emerges between Russia and Ukraine over the rights to Crimea.

Since the price of West Texas Intermediate (WTI) crude broke out to over $100.00 a barrel in early 2011, oil prices have done very little, trading largely in a sideways channel with support in the $80.00 level and resistance around $110.00.

The global economic renewal has helped to support oil prices in spite of the continued stalling in China. Return to growth in the eurozone is also adding some support, but for oil prices to shoot higher, there really needs to be a geopolitical event, such as what we are seeing in Crimea. Of course, don’t forget the Middle East, which still has its major issues, especially with the speculation that Iran is building nuclear-enabled weaponry.

Light Crude Oil ChartChart courtesy of


There’s also the crazy dictator of North Korea, Kim Jong-il, who has continued on the same path his father was on, isolating the country. His testing of several missiles earlier this week into South Korea was just another signal that he craves attention.

At the end of the day, to make money in oil will largely be dependent on the hot spots of the world.

While I doubt Russia will launch a military assault on Ukraine, you never know with President Putin. If this should happen, oil prices would vault higher to above $110.00 a barrel, and likely maybe even higher toward the $150.00 level, last reached in 2008 prior to the subprime crisis.

So while oil prices could ratchet higher on the charts, I’m not convinced Putin would risk the damage to Russia’s economic growth, which is largely dependent on energy sales. Revenues derived from oil and gas represented a shocking 52% of the country’s federal budget and over 70% of the country’s exports in 2012, based on info from PFC Energy. (Source: “Russia – Analysis,” U.S. Energy Information Administration web site, updated March 12, 2014.)

The reality is simply that there’s too much to risk for Putin and the mega-rich oil companies in Russia, which is why the current situation may be merely staging and posturing by Russia.

Now, if Russia doesn’t pull back and the rhetoric continues from Russia, we could see oil prices continuing to edge higher. As I said, you can play a possible upside move by buying the United States Oil (NYSEArca/USO) exchange-traded fund (ETF). It tracks the movement of WTI crude oil. For added leverage, you could also consider playing the ProShares Ultra DJ-UBS Crude Oil (NYSEArca/UCO) ETF.

Just remember: oil should only be viewed as a trade and not an investment, as I doubt a surge in oil prices is sustainable without any major geopolitical event at this time.

Gold could also jump if the situation worsens in Crimea; read my take on gold in “How Gold Has Caught Me by Surprise.”