Tensions along the Ukrainian border with Russia have dominated headlines over the last few weeks.
What started as aggressive posturing has now led to a de facto occupation of eastern Ukraine by the Russian military.
On Monday, Russian President Vladimir Putin ordered troops into Donetsk and Luhansk. Putin declared that Russia would recognize the two regions as being “independent.”
This is a marked escalation and things now appear to be at a boiling point…
Today, I want to look at what that means for one market in particular… crude oil prices.
The current narrative around oil is that armed conflict will put further strain on an already tight supply.
After all, Russia is one of the world’s largest producers of crude oil…
But I don’t think it’s that simple.
My analysis suggests that we’ll see a short-term spike in oil prices, but such a rally would ultimately be short lived.
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The Importance of 2008
2008 was the start of a new trend for crude oil.
Since then, the Russian military has taken two significant actions…
First, they invaded Georgia in August of 2008.
Second, they annexed the Crimean Peninsula in February 2014.
Let’s see what oil prices did on each of those dates…
Notice how around the time of both those conflicts, the price of oil did the opposite of what most analysts would expect. Instead of a mega rally, oil sold off hard.
After the invasion of Georgia, oil prices plunged as much as 63% before finding a floor.
The annexation of Crimea saw oil prices dive as much as 66% over the next two years.
In both instances, crude oil was trading a little over $100 a barrel (between the two red lines).
Today, crude oil is trading around $92 a barrel and rising…
Any armed conflict could see a temporary spike that would take prices into the $100 per barrel range… leaving oil vulnerable to a sharp selloff after reaching this target.
In the past, the $100 range in crude oil has served as an exceptionally strong technical resistance. I wouldn’t count against it failing this time around.
Ultimately, there are two ways to play this…
You can establish a long position in anticipation of a run up to the $100 level. That way, you’ll take advantage of a rise in crude oil prices.
Or you can establish a short position for the bigger reversal to come. If crude oil sells off as hard as the last two military events, it should be a nice profit for traders.
Happy Trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Kathleen shares her thoughts on Jeff’s recent essay about three truths to options trading…
This excellent article needs to be transformed into a video training session with some more depth into measuring risk and return. Thank you and amen!
– Kathleen R.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].