Investment bank Goldman Sachs is rowing back on its previous bearish position on oil as it notes the market is in deficit for the first time in nearly two years.

The call drives big moves in both the European contract Brent and its US counterpart West Texas Intermediate, up to their highest levels since October 2015, and supports widespread strength in the oil and gas sector. Tullow Oil (TLW) rises 4% to 258.5p and Royal Dutch Shell (RDSB) ticks up 0.8% to £17.46.

Goldman analysts had previously warned oil prices could dive to $20 per barrel. But falling production and supply outages in Nigeria and Canada has seen the glut of crude eroded and Goldman expects the deficit to persist through the second half of 2016. It raises its second half forecast from $45 to $50 per barrel.

Goldman is influential on commodity prices and predicted $100 per barrel oil prices in March 2005 before that threshold was reached in February 2008. Though its forecasting credentials were tarnished when it subsequently predicted oil would hit $200.

The bad news for investors in the sector is that Goldman expects the crude surplus to return by 2017 and actually cuts its forecast for the first quarter of next year from $55 to $45 per barrel.

Issue Date: 16 May 2016