Oil: Goldman Sachs expects another dip in crude prices

Goldman Sachs believes that the rally in crude oil prices over the past few months has prevented a reduction of oversupply and will therefore lead to lower prices going forward.

While several analysts have predicted that oil could climb to around $70 a barrel before the end of 2015, Goldman believes the price may have gotten ahead of itself and has warned that oil was now trading at a premium compared to its own "still weak fundamentals".

The investment bank explained in a 12 May note to clients that those weak fundamentals included rising oil stockpiles. It estimated that the global oil market will be oversupplied by 1.9 million barrels per day in the second-quarter of 2015 owing to increases in production by Iraq, Russia and Saudi Arabia.

And the bank's commodities team, led by Damien Courvalin, added that the decline in US drilling activity would not be large enough to put production on a "persistent downward trend".

US producers are expected to increase production again if the WTI price settles above $60 a barrel, putting pressure on prices.

However, Goldman accepted that a "sequential decline" in prices might not begin until later in the year.

Brent crude was trading 2.13% higher at $66.29 a barrel at 01.09pm BST on 12 May.

US crude was trading 1.91% higher at $60.38 a barrel.

Goldman Sachs said: "We believe that the recent price rally is premature.

"Prices need to sequentially weaken, to resume the oil market rebalancing as well as help correct the still intact imbalance of too much capital looking for opportunities in the energy space."

Courvalin said: "With evidence at hand that U.S. 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."

SocGen forecast

Societe Generale, on 11 May, said the odds of another sharp fall in the price of crude oil was fast receding.

The French bank expects oil prices to stabilise over the next six months.

SocGen forecast that Brent crude could trade at an average price of $60 a barrel in the third-quarter of 2015 and then rise to $65 a barrel in the fourth-quarter.

Opec shocker

On Monday, prices reacted to reports relating to oil cartel Opec.

A draft report by the cartel - seen by The Wall Street Journal - stated that it expects crude to remain below the psychologically important $100-a-barrel mark until at least 2025.

In March, Goldman Sachs president Gary Cohn, told CNBC that he was very concerned about the short-term window for crude, and even predicted prices to fall to $30 a barrel. Prices, however, did not drop to those pits.