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The rally in oil over the last couple of months has derailed a rebalancing of the commodity's price and will cause it to weaken, Goldman Sachs warned Tuesday. (Tweet This)
"We believe that the recent price rally is premature" the investment bank's commodities team, led by Damien Courvalin, said in a note published Tuesday morning.
"Prices need to sequentially weaken, to resume the oil market rebalancing as well as help correct the still intact imbalance of too much capital looking for opportunities in the energy space."
The price of oil collapsed from near-$120 a barrel in June last year to lows of around $45 a barrel in January, although it has since bounced back to around the $60-a-barrel level. Analysts are now contemplating oil's "new equilibrium," with a slew of market watchers predicting that prices could climb to around $70 before the end of the year.
However, Goldman Sachs said the price may have gotten ahead of itself and warned that oil was now trading at a premium compared to to its own "still weak fundamentals."
These weak fundamentals include rising stockpiles of oil, it explained, and production growth is expected next year from low-cost producers such as Saudi Arabia, Iraq and Russia.
Added to this, Courvalin and his team said that the decline in the number of operational rigs in the U.S. wouldn't be large enough to put production on a "persistent downward trend." Meanwhile, U.S. producers are expected to ramp up production again if the WTI price settles above $60 a barrel.
Nonetheless, Goldman Sachs accepted that this "sequential decline" might not begin until later in the year.
"With evidence at hand that U.S. producers responded aggressively to low prices, the burden of proof has shifted to how they will respond to the recent recovery and whether low-cost producers can sustainably deliver higher production," Courvalin said.
"This may, as a result, delay the sequential decline in prices until this fall, especially as we approach a period of seasonally stronger summer demand."
The dramatic fall in the price of oil has been due to weak demand, a strong dollar and booming U.S. oil production, according to the International Energy Agency (IEA). OPEC's reluctance to cut its output has also been seen as a key reason behind the fall.
U.S. shale producers have been busy dialing back their operations due to this price environment and research firm Baker Hughes reported Friday that the U.S. oil rig count had fallen for the 22nd consecutive week.
In March, Goldman Sachs President, Gary Cohn, told CNBC that he was very concerned about the short-term window for oil, and even predicted that crude prices could fall to $30 a barrel. Prices for crude, however, never reached those depths.
Brent crude futures traded higher Monday at around $65.25 a barrel at 9:00 a.m. London time, and U.S. WTI crude was also higher for the session at $59.53. This comes after strong gains last week for the commodity.
On Monday, the oil price reacted to reports relating to the Organization of the Petroleum Exporting Countries (OPEC). A draft report by the organization - seen by The Wall Street Journal - stated that it expects oil to remain below the psychologically important $100-a-barrel mark until at least 2025.
On Tuesday morning, Goldman Sachs also downgraded its 2016 production forecast and now expects non-OPEC countries (excluding the U.S.) to see a decline by 200 killobarrels of oil per day versus a previous estimate of it growing by 190 killobarrels.
It also estimated that the global oil market will be oversupplied by 1.9 million barrels per day in the second quarter of 2015 due to increases in production by Iraq, Russia and Saudi Arabia.