Investing.com – Goldman Sachs warned that the recent rally in oil prices was not based on fundamentals and played down recent hopes that an agreement between members of the Organization of Petroleum Exporting Countries (OPEC) would be able to sustain current prices.
"While oil prices have rebounded sharply since August 1, we believe this move has not been driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar," Goldman said in a note to clients dated August 22.
Hopes that OPEC may come to an agreement to stabilize the market in informal talks to be held on the sidelines of the International Energy Forum in Algeria on September 26-28 helped oil enter a bull market with prices up more than 20% through last Friday.
“We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters,” the country’s energy minister Al-Falih said on August 11.
Goldman remained skeptical about the effectiveness of such a freeze, which could become “self-defeating” as higher prices incentivized increased output elsewhere.
"Thawing relationships between parties in conflict in areas of disrupted production would be more relevant to the oil rebalancing than an OPEC freeze, which would leave production at record highs," these analysts said.
"A production freeze would also likely prove self-defeating if it succeeded in supporting oil prices further, with the US oil rig count up 28% since May," they added.
These experts also noted that Saudi Arabia and Iran continued to focus on market share, making it unlikely for a unilaterally accepted freeze, even while disruptions in supply from Nigeria, Iraq and Libya appeared to be easing.
"Given the large uncertainty on the timing, magnitude and duration of such supply shifts, we continue to view oil as having to price near-term fundamentals with a lower emphasis on the more uncertain longer-term fundamentals," they affirmed.
Goldman further downplayed the effectiveness of a production freeze because “even if flows fail to materially increase in each country, we reiterate our view that the oil price recovery is tenuous.”
The firm reiterated its forecast for Brent to remain between $45 and $50 through to next summer, but pointed to the downside in their own expectations for West Texas, warning that if easing of supply disruptions rebounded by 500,000 barrels more than they currently estimate, they would likely slash their 2017 forecast for U.S. crude to $45, from the current $52.5.
U.S. crude futures tumbled 1.08% to $46.90 by 10:14AM GMT, or 6:14AM ET, on Tuesday, while Brent oil slumped 1.10% to $48.62.