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Global Macro: Oil Prices Should Stay Suppressed on Fundamentals

NEW YORK (TheStreet) -- United States Oil  (USO) could remain range-bound in 2014 as tensions in the Middle East may ease and demand from China decreases.

On Monday, Iran said it will halt some of its most sensitive nuclear operations in an attempt to recover more than $4 billion in frozen oil revenue. The discontinuation of uranium-enrichment sites led the U.S. and United Nations to lessen the severity of penalties on Iran.

The increased revenue will greatly benefit the struggling Iranian economy, and a larger oil supply from Iran should help drive down the price of oil.

Meanwhile, there's a possibility of reduced tension in Syria if peace talks in Geneva bear fruit. Still, that will be tough as this past week photographs were allegedly obtained showing that the magnitude of violence carried out by the Syrian government on its people was more severe than originally believed. 

In China, it was reported Monday that gross domestic product growth for 2013 beat estimates, and yet demand for oil rose by only 1.6%, versus a forecast of 3.8%. Growth in the country is hovering dangerously close to the 7% threshold, which would signal a big slowdown in economic output.

If China's demand for energy remains weak in 2014, alongside sub-7% growth, oil prices could stay at their currently suppressed levels.

A technical analysis of the oil index shows that overhead resistance could keep prices suppressed as the fundamental picture weakens. The oil index has declined significantly since its highs in September, when the Syrian conflict was at its greatest.

A number of factors would have to come into play for the index to reach prices in the 40s again, which looks unlikely based on the arguments laid out in this article. The continued strength of the U.S. dollar and the possible diminishing risks in the Middle East this year should be enough to keep the index in a tight trading range over the next few months.

USO ChartUSO data by YCharts

At the time of publication, the author had no position in the index fund mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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