Goldman Sachs warns recent oil rally won't last and prices must fall to rebalance the market

Jessica Morris
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Oil Prices Hit Historic High On Weak Dollar
Goldman coined the "lower for even longer" view on oil prices (Source: Getty)

Goldman Sachs today warned the recent rally in oil prices is likely to prove short-lived, as it said they must fall to bring balance to a market drowning in oversupply.

The bank cast doubt on a recent bout of renewed optimism, which sent Brent crude above $40 per barrel and made metal prices sparkle yesterday.

It said the rout, which has kept oil prices in the doldrums for the last 20 months, still has more ground left to cover. This is also true for iron ore, gold and copper prices.

"While we still believe oil will likely rebalance this year and create a deficit market by year end, ‘green shoots’ of a deficit alone are not sufficient for a new sustainable bull market," Goldman analysts wrote in a note.

"Only a real physical deficit can create a sustainable rally which is still months away should the behavioral shifts created by the low prices in January and February remain in place."

The bank thinks oil prices remaining low will be vital to the market's recovery, squeezing cash strapped producers and easing the imbalance between demand and supply.

"Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring," they said.