Light Crude Oil Prices Straddle Key Technical Levels Amid Supply Concerns

Light crude oil futures are trending lower on Thursday, hovering around the critical 200-day moving average. This technical indicator could play a pivotal role in determining the longer-term direction of oil prices. Should prices fail to hold above this level, it could trigger a further decline into a key retracement zone that has previously halted selling pressures on three separate occasions since early June. On the upside, any gains are expected to be capped by the 50-day moving average unless a significant bullish catalyst, such as a major supply disruption in the Middle East, materializes.

At 09:31 GMT, Light Crude Oil futures are trading $74.22, down $0.30 or -0.40%.

Libyan Supply Disruptions Add Volatility

Earlier in the session, oil prices saw a slight uptick after two consecutive days of losses, driven by renewed concerns over supply disruptions in Libya. However, the smaller-than-expected draw in U.S. crude inventories dampened demand expectations. According to data from the Energy Information Administration (EIA), U.S. crude stocks fell by 846,000 barrels to 425.2 million in the past week, falling short of the 2.3 million barrel draw anticipated by analysts.

The situation in Libya, a key OPEC member, is particularly concerning. Ongoing conflicts over control of the central bank have led to significant disruptions in oil production, with some estimates suggesting output has been reduced by 900,000 to 1 million barrels per day (bpd). Given that Libya’s production in July was around 1.18 million bpd, the impact of these disruptions could be substantial.

OPEC+ Production Plans Under Scrutiny

The duration of Libya’s supply issues could have significant implications for OPEC+ production decisions scheduled for October. If the disruption continues, OPEC+ may feel more comfortable proceeding with planned supply increases in the fourth quarter of 2024. However, a shorter disruption could complicate these decisions, especially with ongoing concerns about global oil demand. Analysts from ING suggest that OPEC+ would likely hesitate to increase supply in the face of lingering demand uncertainties.

Fed Rate Expectations Provide Support

In addition to supply concerns, expectations of a potential rate cut by the U.S. Federal Reserve are also providing some support for oil prices. Federal Reserve Bank of Atlanta President Raphael Bostic recently indicated that interest rate cuts could be on the horizon, citing lower inflation and higher-than-expected unemployment. Lower interest rates typically make borrowing cheaper, which could boost economic activity and, in turn, increase demand for oil.

Market Forecast: Bearish with Limited Downside

Given the current technical positioning and the mixed signals from both supply disruptions and demand forecasts, the near-term outlook for light crude oil appears bearish. However, downside potential may be limited by ongoing supply concerns, particularly in Libya. Traders should watch for any developments in Libya and OPEC+ decisions, as these could be pivotal in determining the next move for oil prices.

Technical Analysis

Daily Light Crude Oil Futures

Light crude oil futures are drifting lower on Thursday after giving up earlier gains.

Moving average support is being provided by the 200-day moving average at $74.28. Resistance is the 50-day moving average at $76.86. It stopped the rally on Monday.

A short-term retracement zone at $76.58 to $78.25 also provided resistance earlier in the week. A test of the major support zone at $73.43 to $72.01, attracted buyers on June 4, August 5 and August 21.

Both the moving averages and the retracement zones create the opportunity for a rangebound trade. This matches the balancing act created by low demand and the potential for a supply disruption.