Libyan Rebels Suffer Setbacks: How to Trade (USO, OIL, SCO)

Oil prices rose to a 2 1/2 year high during trading in Asia, as the market reacted to news that rebels in Libya had suffered setbacks and a rise in China's Purchasing Managers Index. After declining for months, China's Purchasing Managers Index for March climbed to 53.4, up from 52.2 for February. The rising index indicates that manufacturing activity in China may be on the rise and that demand for oil will follow. Another factor that sent the price of oil higher was the news of losses suffered by Libyan rebels. The momentum of the conflict in Libya has shifted back and forth between forces loyal to long time leader Colonel Moammar Gadhafi and rebels opposed to his rule. The revolutionary movement in Libya sprang up as uprisings in the country's North African neighbors of Tunisia and Egypt led to the leaders of those two countries being ousted from office. The rebel forces took control over a large amount of Eastern territory and it seemed like a quick victory may have been approaching. However, Gadhafi's better equipped forces, backed by air support, fought back and it looked as though the rebels might be crushed. International pressure to stop Gadhafi from massacring his own people during assaults on rebel-held cities led to the United Nations Security Council approving a no-fly zone over Libya. Enforced by the air and sea power of the United States, France and the United Kingdom, the no-fly zone took away the biggest advantage enjoyed by Gadhafi's forces and the rebels were able to regain lost territory. However, it now looks as though Gadhafi's forces have adapted to the new battlefield conditions and have achieved more victories. The Western powers have stated that they do not want to engage in a ground war and that their mission is to protect the Libyan people, not remove Gadhafi from office, so it's looking as though Libya may be in for a long, drawn out civil war. If this is the case, oil exports will suffer and prices may rise even higher. Whatever the outcome, the situation in Libya provides an investment opportunity. If the conflict follows this pattern of back and forth gains and losses for both sides and Western powers don't put troops on the ground, while Chinese demand for oil continues to rise, then the United States Oil Fund

and the the iPath S&P GSCI Crude Oil Total Return Index ETN

are two investments that should climb higher. On the other hand, if one side or the other is able to secure a victory, or if the Chinese authorities attempts to cool the economy lead to reduced demand for oil from China, the ProShares UltraShort DJ-UBS Crude Oil

ETF should see its share price moving up.