Goldman Sachs thinks the oil rally should be burning out.

The bank’s influential oil analyst team, led by Jeffrey Currie and Damian Courvalin in New York, say that while the 40 per cent rally since January has been impressive, markets are still oversupplied and higher prices may see US shale drillers add to the surplus, David Sheppard writes.

The move higher has also been boosted by near-record hedge fund buying, the analysts say, which could lead to a sharper fall if they all try to take profits at once.

Goldman said in a note to clients, dated May 11:

While low prices precipitated the market rebalancing, we view the recent rally as premature with crude oil prices expensive relative to current and forecast fundamentals,”

We therefore view this rally as derailing this rebalancing and setting the stage for sequentially weaker prices, especially with oil speculative length as long as when oil traded at $100 a barrel.”

The Goldman analysts says they now see the global market as much as 1.9m barrels per day in surplus in the second quarter, up from their view in January of a 1.3m b/d excess.

Like any canny trader though, the Goldman team is hedging, inserting a few caveats as to why prices might not head lower just yet, even with US benchmark West Texas Intermediate back near $60 a barrel and international benchmark Brent above $65 a barrel.

They want to see more concrete proof from the US shale community that they can definitely transform the recent price gains into an Opec-defying output increases.

The Goldman note says.

Ultimately, with evidence at hand that US 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.

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.”