Crude Oil Rally Is Vulnerable as Contango Widens, Goldman Says

March 27 (Bloomberg) -- Oil’s rally to a four-month high is vulnerable to a correction because near-term demand for crude isn’t yet strong enough to support a sustained advance, Goldman Sachs Group Inc. said.

The discount for crude delivered in May, the front-month contract in New York, compared with July futures widened to as much as $3.47 a barrel this week from $1.18 earlier in the month. That indicates a surplus of oil for immediate delivery. U.S. oil inventories rose to a 16-year high last week.

“The current rally was accompanied by weakened timespreads and weaker fundamentals,” Jeffrey Currie, a London-based analyst at Goldman, said in the bank’s Energy Weekly yesterday. “This leaves the market vulnerable to near-term pullback.”

Oil for May has gained 10 percent since the Federal Reserve announced plans to spur a U.S. recovery by purchasing $300 billion of treasuries to bring down long-term interest rates. That raised demand for longer-dated crude futures on speculation the policy would boost economic growth coupled with concern the increase in money supply may spark inflation.

“Last week’s rally was entirely back-end driven as the focus shifted to future fundamentals following quantitative easing efforts,” Goldman said. A more sustained advance is possible “once it becomes clear that the underlying balance of the market has tightened enough to draw inventories globally.”

The oil market has been in so-called contango, where spot prices are cheaper than longer-dated futures, since August as the economic slump cuts demand, causing inventories to rise.