Oil has been surging this week but Goldman Sachs is calling for gains to be short-lived.
The front-month West Texas Intermediate futures contract enjoyed a double-digit advance in recent days, breaking above $50/bbl on Thursday for the first time since July:
"While this rally has occurred alongside a broader re-risking across assets after last week's U.S. non-farm payrolls release, the oil move has been larger, exacerbated by still large short positioning and the break of key technical levels," wrote Jeffrey Currie, head of commodities research at Goldman Sachs.
Currie writes that we've seen this play before, pointing to the parabolic surge in oil prices in late August that occurred following the massive equity market selloff.
The problem, according to Goldman, is that the fundamentals have not changed: in spite of the start of a roll-over in U.S. production, the market remains oversupplied. While the shale revolution was what provided the impetus for the plunge in oil prices seen over the past year, Currie claims that the oil glut is now being sustained by production outside the U.S.
The U.S. dollar index has given back ground over the past two weeks amid growing confidence that the Federal Reserve will refrain from lifting interest rates in 2015. But Currie claims continued inaction from the central bank isn't necessarily a boon for crude prices; in fact, he contends that it would have the opposite effect.
While "a Fed on hold could offer some reprieve to the emerging market rebalancing, this decision would ultimately be driven by weaker underlying activity, leaving risks to oil demand and our forecast skewed to the downside," he wrote. "Net, we expect this rally to reverse and reiterate our forecast for lower prices for longer."
One month ago, Goldman's commodities team indicated that the price of crude could fall as low as $20/bbl and stay at relatively depressed levels for up to a decade and a half.