Oil rally driven by long-term fundamentals: Goldman

LONDON (Reuters) - Fund flows have been the effect rather than the cause of high oil prices, investment bank Goldman Sachs said on Tuesday, as it called the oil rally a "structural" one based on fundamentals.

The bank also said that speculative activity, blamed by many including some OPEC officials for high prices, was not the primary driver of the price rally, although it may have had some impact on prices.

"We maintain that the recent oil price rally has been largely fundamentally driven and that the fund buying is more likely the result of rising prices rather than the primary cause," analysts at the bank said in a research note.

"The recent rally has been driven by the same long-term structural supply issues which have driven the energy price rally of the past decade, not investor buying," the note said, adding that the rally had also impacted commodities such as coal where there is little speculative activity.

U.S. crude oil futures hit a record high of $103.95 a barrel on Monday, continuing to test new records amid a broad-based rally that has propelled various commodities to new peaks as investors look at it as a hedge against rising inflation.

Goldman analysts led by Giovanni Serio said much of oil rally in the past month was been driven by higher long-dated oil prices, underscoring its long-term nature and that it was not being driven by concerns of short-term supply-demand balance.

The research report said despite the rise in oil prices for future years, short-term fundamentals were weak and there was some potential for a near-term sell-off.

"However, we would view any meaningful pull-back in prices as representing a buying opportunity," Goldman said.

Goldman analysts said escalating industry costs and the need to motivate new investment in an industry that has exhausted spare production capacity continue to be the main driver of oil prices.

"While the ability of commodities as an asset class to act as an inflation hedge has attracted increased investor interest in the recent period as inflation concerns mount, we believe that the increase in fund activity has played, if any, only a modest role in the recent rally," the noted said.,

It added that speculative activity was also lower than generally believed, noting that the open interest in the oil market had not increased to any significant extent in the past few months and remained largely below last year's levels.

(Reporting by Santosh Menon; editing by James Jukwey)