March 8, 2016 / 6:06 PM / in 3 years

Recent surge in commodity prices is premature: Goldman Sachs

(Reuters) - The recent surge in prices of oil and other commodities has come prematurely, says Goldman Sachs, arguing that lower prices are needed for markets to rebalance.

A general view shows an drilling rig at the Lukoil company owned Imilorskoye oil field, as the sun rises, outside the West Siberian city of Kogalym, Russia, January 25, 2016. Picture taken January 25, 2016. REUTERS/Sergei Karpukhin

Oil prices have rallied more than $10 a barrel in less than a month, as investor sentiment started changing after decade-low prices forced producers across the globe to cut production. [O/R]

However, an early rally in oil prices would prove self-defeating as it would limit the supply curtailments that are necessary to rebalance the market in the second half of 2016, the bank said in a note to clients.

“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,” Goldman Sachs said.

The bank expects volatility in the oil market to continue, with prices fluctuating between $20 and $40 a barrel in the near-term.

The oil market will rebalance by the end of the year, only if prices stay around the levels seen in January and February, it said.

“Only a real physical deficit can create a sustainable rally,” the bank said.

“Green shoots” for the oil market include lower U.S. production, supply disruptions in Iraq and Nigeria, and significant potential reductions in output in other parts of the world, the bank said. However, this will not be enough to maintain the current rally.

“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 Sachs said.

Goldman Sachs also maintained its bearish view on gold despite its rally since January. It also expects the rally in iron ore rally will prove temporary, maintaining its end-of-year target of $35 per tonne.

Reporting by Jacob Gronholt-Pedersen in SINGAPORE and Nithin Prasad and Vijaykumar Vedala in BENGALURU; Editing by Christian Schmollinger

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