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Oil Prices Supported by Middle East, Ukraine Events, Not Fundamentals

NEW YORK (TheStreet) -- Brent crude oil futures retreated from highs of $115 in recent weeks as fundamental factors have failed to support prices.

Brent futures, also represented by the exchange-traded fund United States Oil (USO), jumped above $115 in June as geopolitical conflict in both Ukraine and Iraq led speculators to worry about supply disruptions.

The move in oil prices sent energy stocks including Exxon Mobil (XOM - Get Report), Chevron (CVX), Schlumberger (SLB), ConocoPhillips (COP), EOG Resources (EOG), and Occidental Petroleum (OXY) higher.

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In Ukraine, Russian separatists attempted to capture cities to bring them under Russian control. Oil prices have fluctuated daily with the markets view of how well peace negotiations are going between Russia and Ukraine.

Meanwhile, in Iraq and Syria, Sunni militant groups have seized several cities and declared an Islamic state. The threat reminds analysts of the Arab Spring revolts three years ago, which could lead to supply disruptions in OPEC's two largest oil producers, Saudi Arabia and Iraq.

With volatile geopolitical events being the catalyst for oil price increases, it is unlikely that prices stay elevated for long periods of time.

In the chart below, the price action of oil tends to spike higher on the initial reaction to a geopolitical event taking place, but decline in the aftermath, when speculators realize they have pushed prices up too high.

For example, the Arab Spring in 2011 led to a rapid increase in the price of oil in the first few months of the year. Once the spike occurred, however, prices deflated and began to decline.

USO Chart
USO data by YCharts

This could be the case in 2014. The underlying global economy remains in a gradual recovery, with central banks across the world continuing to enact simulative policy.

International Monetary Fund Managing Director Christine Lagarde signaled on Sunday that her institution may cut its global growth forecasts for this year as investment is still weak and risks remain in the United States economy.

"The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment" Lagarde told the Cercle des Economistes conference in Aix-en-Provence, France.

A robust global economy would increase demand for oil, and thus lead to a sustainable increase in prices. Speculative supply disruptions, however, lead to volatility in oil prices, which means prices may fall to new lows as quickly as they spike above $115.

At the time of publication the author had no position in any of the stocks mentioned.

Follow @macroinsights

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

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