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Here's how to play oil's volatility

Following news of a possible merger between Royal Dutch Shell and BG Group, CNBC's "Fast Money" traders said now my be a good time to think about a few oil plays.

U.S. oil prices settled 3.5 percent higher on Tuesday at $53.98 a barrel. That was its highest level since December, but some Fast Money Traders say investors shouldn't trust the bounce.

"A lot of people were expecting deal flow like this. This Royal Dutch deal, to me is what we're going to see more of," Fast Money trader Tim Seymour said. "We're going to see the strong hands begin to look over, pick over and be opportunistic to the upside."

He said he thinks Brent prices have seen they're lows of the year. On the other hand, oil price tracker Tom Kloza said he disagrees with the notion that Brent may have seen its highs.

"We're seeing all most record investment flowing into Brent on the long side and that scares me," Kloza said. "I think that oil still has a period where it's gonna go down and maybe retest the lows."

When it comes to trading the uptick in oil, Fast Money trader Guy Adami, says investors should look at oil and gas refiner Tesoro. "You gotta own it above $85, below $85 it get a little bit dicey in terms of the technicals," Adami said. "Everybody's been trying to play Exxon and Conoco, valuation wise, [but it] hasn't really gone anywhere."

Fast money trader Brian Kelly says the way to play the pop is buy GSG, the CRB index. "It's really heavy oil. I think that's the way to play, even if you get a little pullback tomorrow. Crude oil hasn't responded to this oversupply in the last weeks so you gotta be long it still."

Disclosures:

Tim Seymour is long T, BAC, C, DIS, XOM, F, GE, GM, GOOGL, INTC, SUNE, Tim's firm is long BABA, BIDU, MCD, NKE, NOK, SBUX.

Steve Grasso is long AAPL, EVGN, MJNA, PFE, T, TWTR, GDX, his firm is long USO, IBM, FCX, MCD, KO, NE, NEM, OXY, RIG, VALE, TSE, his kids own EFG, EFA, EWJ, IJR, SPY.

Brian Kelly is long BTC=, US Dollar, GLD, EEM, CTRL calls, GSG, BBRY, SPY puts, TLT, 30 Year Bond Futures, he is short Yuan, today he bought 30 Year Bond Futures.

Guy Adami is long CELG, EXAS, INTC, Guy Adami's wife, Linda Snow, works at Merck.