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Oil Rally Won’t Last: Goldman Sachs

The nearly four-month rally that has added 40 percent to oil prices can’t last and is due for a large correction, according to multinational investment bank Goldman Sachs.

“While low prices precipitated the market rebalancing, we view the recent rally as premature with crude oil prices expensive relative to current and forecast fundamentals,” Goldman told clients in a note dated May 11.

Goldman increased its outlook on the global market surplus to 1.9 million barrels per day in the second quarter, up from an earlier estimate of a 1.3 million bpd surplus.

Plunging oil prices since last June led to a huge drop in the number of US oil rigs in operation, a sign record output will eventually slow. The US shale boom, along with weaker demand growth and peak OPEC production, has resulted in a precipitous decline in the price of crude. However, a weaker US dollar and a worsening scenario in Yemen has helped to prop up oil prices in the early part of the year.

Crude prices rallied more than 2 percent on Tuesday as OPEC raised its demand outlook ahead of a key inventory report on Wednesday.

The Goldman note added:

“Ultimately, with evidence at hand that US producers responded aggressively to low prices, the burden of proof has shifted to how they will respond to the recent recovery and whether low-cost producers can sustainably deliver higher production.

This may as a result delay the sequential decline in prices until this fall, especially as we approach a period of seasonally stronger summer demand.”

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