Breakout

Oil could hit $125, here's how to trade it

Breakout

WTI Crude oil futures for July delivery hovered around $107 a barrel, up slightly despite a worsening situation in an oil producing nation that’s getting more dire. Iraq is spiraling into chaos, with the terrorist splinter group ISIS not only taking territory in northern Iraq in places like Mosul (largest city in northern Iraq), Baiji and Tikrit, but also attacking the largest oil refinery in Iraq.

The oil refinery, located near Baiji, is responsible for handling part of the 3.45 million barrels a day being pumped out of the ground in Iraq. Although the refinery is only producing oil products for Iraq’s domestic consumption, the fact that there are threats to the oil infrastructure of a country producing around 4% of the world’s daily supply of crude should be alarming to the capital markets.

In the short term, Jeff Kilburg of KKM Financial predicts we could be seeing oil return to levels not seen since last year. “At the end of the day we’re going to see a fragmented Iraq, I don’t think this resolves anytime soon,” he says in the attached video. “I think last summer’s high of $112 in WTI crude, I think technically that’s where we go in the short term.”

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Although it seems oil’s poised for a spike, Macke notes that crude was at these levels last year and there wasn’t really a big catalyst like instability in Iraq pushing it higher. Kilburg, however, says this could just be a stepping stone to a coming price spike in crude.

“Iraq, the number two largest oil producer in OPEC, if that gets shut down or taken in the wrong hands, that’s really going to disrupt the supply,” Kilburg warns. “So I think you could potentially see a knee-jerk reaction back up to $125. And these moves happen quickly.”

The issue when oil jumps quickly, Kilburg notes, is the oil trading pits become illiquid, meaning prices can spike even more. What this means for consumers here in the U.S. are prices at the pump shooting 30 to 40 cents a gallon.

As a trade off of a spike in oil, Kilburg advises owning the Energy Select Sector SPDR ETF (XLE) and refiners like Anadarko Petroleum (APC) and Valero Energy (VLO).

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