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Halftime: Are Energy Bulls Running Blindly?

On Wednesday investors were trying to make heads or tails of the stock market with the S&P 500 trading in negative territory, one day after its worst session since August.

And the action would have been even worse, if not for the energy sector.

Energy bulls drove the XLE higher, generating a pocket of strength in the S&P but that strength may be a double edged sword.

Rather than being a signal of global growth, these gains are largely tethered to the rapidly spreading unrest in the Middle East and concerns about oil supply disruption.

According to CNBC’s Sharon Epperson, at least a quarter of oil production in Libya has been shuttered and the concern is that the unrest is spreading to other oil producing nations.

"If Libya and Algeria were to halt oil production together, prices could spike above $220 per barrel,” say analysts at Nomura.

However, that not to say sky-high oil is a foregone conclusion.

Earlier in the week, widely followed commodity investor Dennis Gartman told us that “$100 oil won’t last." He simply thinks that as the dust settles investors will come to realize there's an awful lot of supply, especially of WTI.

And if youre worried about Saudi Arabia, odds are you shouldn't be. In a live interview on CNBC’s Halftime Report Peter Zeihan of Stratfor told us the chances of serious supply disruptions in Saudi Arabia are only 1 in 5.

In fact, OPEC should be able to fill any gaps generated by unrest in Libya. OPEC's spare capacity is said to be near 5 million barrels a day; andSaudi oil minister Ali Naimi has said “When we see a shortage in supply, we will rectify that immediately. There’s absolutely no reason to be concerned on the supply side even if disruption were to happen.”

Considering there are strong arguments to be made for and against the energy trade, how should you position?

Instant Insights with the Fast Money traders

Trader Joe Terranova sees mostly opportunity. “Energy equity names are a classic case of buy higher and sell higher,” he says.

But rather than gamble on the Mideast, he likes exposure to nations where there’s less geo-political risk. His favorite play is Canada, but Terranova also suggests looking at opportunities in Brazil such as longPetrobras and he’s bullish Russia .

Refiners, however, are the exception to Terranova’s rule. He thinks higher oil prices will squeeze margins.

Brian Kelly agrees with Terranova’s Canada thesis and suggests playing it long Pengrowth Energy Trust and Penn West . Patty Edwards suggests looking at Enerplus Resources . "This is a name I really love," she says, "but I'm a dividend girl."

Jon Najarian is also an energy bull. He’d play it long Suncor and Chevron. Najarian also suggests putting some drillers on the radar including Nabors , Transocean , Diamond Offshore and Halliburton. And he’s bullish Chesapeake as a nat gas play.

It’s worth noting that on Tuesday, esteemed energy analyst Peter Schork was on the other side of the energy trade. “Oil in the mid to high 90’s has been a range to sell into,” he said at the time. Schork felt that oil would remain in a fairly tight range with a ceiling in the high 90's and a floor in the 80's.

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SECOND DERIVATIVE

If you’re looking for a second derivative trade, Patty Edwards may have an idea for you. As risk comes off, she’s watching the sell-off in soft commodities looking to increase positions on the pullback. “I’m long Syngenta and long Potash,” she says. “People still need to eat.”

That’s a theme that Jon Naiarian relates too. He thinks it may be time to put Mosaic , Monsanto and CF Industries on the radar. He’s a buyer when institutional money starts coming into these names.



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Trader disclosure: On Feb. 23, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Terranova Owns (VRTS), (C), (UPL), (GM), (MS), (SLXP), (TEVA), (BAX), (CVI), (RSX), (SU), (CNQ) and (PBR). Jon Najarian owns (CHK), is short (CHK) calls. Jon Najarian owns (DTV), is short (DTV) calls. Jon Najarian owns (BP), is short (BP) calls. Jon Najarian owns (NBR), is short (NBR) calls. Jon Najarian owns (KWK), is short (KWK) calls. Jon Najarian owns (HPQ).

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BRIAN KELLY
Accounts Managed By Kanundrum Capital Own (IAU)
Accounts Managed By Kanundrum Capital Own (SLV)
Accounts Managed By Kanundrum Capital Are Long The Euro
Accounts Managed By Kanundrum Capital Are Long The British Pund
Accounts Managed By Kanundrum Capital Own (TLT)
Accounts Managed By Kanundrum Capital Are Long Oil Futures
Accounts Managed By Kanundrum Capital Own U.S. Bond Futures
Accounts Managed By Kanundrum Capital Own (PWE)
Accounts Managed By Kanundrum Capital Own (PGH)
Accounts Managed By Kanundrum Capital Own (EBAY)
Accounts Managed By Kanundrum Capital Own (DBA)
Accounts Managed By Kanundrum Capital Own (JJG)
Accounts Managed By Kanundrum Capital Are Long The U.S. Dollar
Accounts Managed By Kanundrum Capital Are Long The Australian Dollar
Accounts Managed By Kanundrum Capital Are Long S&P Futures

JOE TERRANOVA
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (NRCI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLF)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (DPUKF)

PATTY EDWARDS
Edwards owns (SPY) for clients
Edwards owns (XLB) for clients
Edwards owns (GLD) for clients
Edwards owns (SLV) for clients
Edwards owns (BA) for clients
Edwards owns (AMZN) for clients
Edwards owns (V) for clients
Edwards owns (JNJ) for clients
Edwards owns (AAPL) for clients
Edwards owns (VZ) for clients
Edwards owns (MSFT) for clients
Edwards owns (C) for clients
Edwards owns (GE) for clients
Edwards owns (TGT) for clients

CRAIG BERGER
FBRCM is a market maker and liquidity provider in (QCOM)
FBRCM is a market maker and liquidity provider in (BRCM)

PETER ZEIHAN
Zeihan has no disclosures

DENNIS GARTMAN SOT 2/22/2011
Funds managed by Dennis Gartman were long Wheat on 2/22/2011
Funds managed by Dennis Gartman were long Corn on 2/22/2011
Funds managed by Dennis Gartman were long Soybeans on 2/22/2011
Funds managed by Dennis Gartman were long Sugar on 2/22/2011

CNBC.com with wires.

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