How to Trade on Libyan Unrest (OIL, USO, SCO)

Oil prices were moving higher on Friday after the United Nations Security Council authorized a no-fly zone over Libya.

In the week before the no-fly zone was announced, Libyan leader Muammar Gaddafi's forces seemed to be making progress. Better equipped than their opponents and backed by air support, it looked as though the tide may have turned in favor of the long ruling Libyan dictator.

James R. Clapper, the United States' Director of National Intelligence, even embarrassed the Obama administration last week when he told the United States Senate Committee on Armed Services that he believed that Gaddafi “will prevail” over the rebels.

Although Western governments may want to see Gaddafi go, most consumers of oil just want stability. So, as it was looking as if Gaddafi might be inching towards a victory, the markets responded favorably to the possibility that the turmoil in Libya might be near an end and that oil exports would no longer be affected.

However, with the new prospect of a no-fly zone over the country, Libya may be in for a long, drawn out conflict, which has sent oil prices climbing back up. Although the no-fly zone should improve the rebels chances for survival, it's not certain that it will actually aid them in achieving a victory.

Western governments loathe the idea of getting involved in a ground war in Libya. Although they may be welcomed by some factions of the rebels, there are those who are against any intervention by Western forces, including a no-fly zone that would help their cause.

Although direct intervention by Western ground forces would most likely lead to a quick downfall for Gaddafi, it's not clear yet who would fill the power vacuum or how long until the liberators were seen as invaders.

The iPath S&P GSCI Crude Oil Total Return Index ETN OIL and the United States Oil Fund USO are two investment alternatives for investors who see the price of oil increasing in the wake of continued fighting in Libya and unrest in the Middle East.

Investors who see the combination of reduced demand from Japan and an eventual cessation of hostilities in Libya leading to lower oil prices should take a close look at the ProShares UltraShort DJ-UBS Crude Oil SCO ETF.