Oil retreated from its 2 and-a-half-year high Monday amid reports that Colonel Gaddafi is negotiating his departure from Libya, but this may not be your typical sell-on-the-news scenario.
In fact, the Fast Money traders are gearing up to build oil positions if Gaddafi's departure triggers a related crude sell-off.
"If Gaddafi is shown on a plane heading to Venezuela, I think oil goes does down $3-$4 a barrel on that headline," says Brian Kelly, Kanundrum Capital President. "I'd be a buyer on that decline."
Kelly cites potential disruptions of light sweet crude supply from Nigeria, which holds elections on April 9, noting that there's never been an election in Nigeria without unrest, clashes, or attacks on oil infrastructure.
Crude oil futures approached $107/bbl Monday, their highest level since Sept. 2008, just before reports of Gaddafi's possible departure. Libyan sources have told the pan-Arab newspaper al-Sharq al-Awsat that Col Gaddafi has turned to the rebel Transitional National Council to secure his departure from the country in return for guaranteeing his and his family's safety, the BBC reports.
Jim Iuorio, TJM Institutional Services director, also sees Gaddafi's potential departure as a short-term positive for stocks and negative for oil. "I understand that the "end" of a conflict feels good...but doesn't this embolden other countries to attempt a disruption?" Iuorio noted. "Who's next? Maybe Bahrain," he added.
Aside from the threat from Nigeria, Kelly is seeing lasting problems in Libya even if Gaddafi goes away. The most likely scenario is one of prolonged unrest in which it's unclear who controls the country.
"The market impact," Kelly predicts, "is from headline risk of who's in control of oil today."
The Fast Money contributor isn't alone. Analysts at Citi and Commerzbank are also raising price targets on oil as the turmoil grows. Citi hiked its Brent estimate to $105 and its WTI price forecast to $94 a barrel from $91 for 2011, citing the "fear premium" and supply disruption threats.
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CNBC.com with wires.