USOIL takes a nosedive while Europe sleeps

Geo-inflences on USOIL

USOIL took a 3.2% plunge, landing at a not-so-comfortable $69.55 per barrel. All those recent gains, gone in a flash. 

Mainstream media immediately turned to China to explain the flash crash. China’s manufacturing numbers came in looking gloomy, and when the world's second-biggest oil guzzler slows down, prices suffer.

It’s a nice story, but traders researching such correlations have noted a lack of consistency with that particular dynamic. The more likely reason for the USOIL drop comes down to supply rather than demand.

The rise of Lybian oil

Libya is back in the spotlight. After the 2011 civil war, the country experienced a steep decline in oil production. Political disputes and armed conflicts between rival factions have frequently disrupted oil production and exports.

A local blockade in the eastern part of the country significantly reduced output by 700,000 barrels per day. This blockade was part of a dispute between the eastern government in Benghazi and the UN-backed government in Tripoli over the leadership of the central bank.

But a recent resolution of this dispute is potentially leading to a complete restoration of Libyan oil production, and just the mere mention of that fired up the sentiment monster causing investors to drop USOIL overnight.

Conclusion

Forecasting oil prices is about as easy as nailing jelly to a wall right now. If China keeps sneezing, will the rest of the world catch a cold? And what about those whispers of interest rate hikes in the US? With Libya pumping more oil and OPEC+ doing their thing, we might end up with more oil than we know what to do with.

Talk of OPEC+ cuts might keep the remaining investors bearish, but Lybia’s oil production increases won’t be reversed. At best, a cut will create price stabilization, but a rebound looks unlikely for now.

Add to that, the Fed is no doubt pulling every trick in the playbook to keep USD strong before election day, so the outlook seems very clear. A USOIL rebound has a lot of weight to lift, and very little to fuel the rise.

While the obvious move is to buy low, there are subtle signals that oil could drop below 60 before settling in a new range. Whether you are a daytrader or a long-term investor, caution and patience is strongly advised.