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Goldman Sachs Expects Oil Rally to Run Out of Steam Soon

Oil prices are likely to pull back in the coming weeks due to the uncertain path of future demand and a “daunting” inventory overhang, Goldman Sachs said in a note dated Monday.

“The collapse in (refining) margins to unprecedented lows is reflective of both over-valued crude prices as well as a more moderate demand recovery, two pillars of our short-term bearish view,” the Wall Street bank said.

Goldman expects Brent prices to reach $35 per barrel in the short term, compared with around $43 hit on Monday.

Oil prices bounced to three-month highs on Monday after the OPEC+ nations agreed to extend record output cuts of 9.7 million barrels per day into July amid signs of a quicker-than-expected economic recovery. [O/R]

Brent crude futures were trading around $41 a barrel on Tuesday. The benchmark contract has vaulted more than 150% since hitting $15.98 in April, its weakest since June 1999.

U.S. West Texas Intermediate (WTI) crude futures rose to $38.45 a barrel on Tuesday.

Goldman raised its 2020 Brent price forecast to $40.40 a barrel from $35.60 earlier, citing positive sentiment around the reopening of economies. WTI prices are now forecast to reach $36 this year, compared with a previous estimate of $33.10.

“This rebound has been fueled by a macro risk-on backdrop and a policy induced Chinese crude import binge, yet fundamentals are turning bearish,” Goldman said.

With demand expectations running ahead of a more gradual and still uncertain rebound, the oil market faces a big challenge of normalising a billion barrels of excess inventories, analysts at the bank wrote.

Goldman expects supplies to increase with U.S. shale and Libyan shut-in production coming back online, which would lead to a deficit of 1.2 million barrels per day (bpd) versus a prior estimate of 2 million bpd for June.

Reporting by Swati Verma in Bengaluru; Editing by Subhranshu Sahu

Source: Reuters