When in September 2008 the global economy was facing a depression to rival that of the 1930s, Jeffrey Currie, head of commodities research at Goldman Sachs, sent investors a note saying that financial concerns were “overriding” the facts in the oil market.

“Current price levels present compelling buying opportunities,” he wrote at the time.

Oil prices, which had fallen from an all-time high of $147 a barrel to $90 a barrel when the investment bank stuck out its neck, did indeed recover briefly to $95 a barrel. But over the next five months they plunged to $35 a barrel.

Fast forward three years and the parallels are striking.

Mr Currie told investors earlier this week to keep faith on their bullish bets on oil even as prices fell under $100. “We believe the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher.”

For many in the market, Goldman Sachs, Wall Street’s biggest commodities dealer, and other investment banks such as BofA-Merrill Lynch and Barclays Capital, which share a bullish view, are making the same mistake of three years ago.

The oil bears point to a double whammy of slowing demand and surging supply weighing down on prices for the rest of the year and into early 2012.

Undeniably, consumption growth has slowed. “Sustained high oil prices and slowing economic growth have dramatically curbed global oil demand,” says the International Energy Agency. While consumption grew at an annual rate of 2.3m barrels a day in 2010, it expects it to increase by just 1.2m b/d this year.

In the US, the world’s largest oil consumer, demand contracted year-on-year in April and May – the first two consecutive months of falls since October-November 2009 – due to the impact of petrol prices around $4 a gallon. Moreover, preliminary data points to further year-on-year declines in June and July.

China, the world’s second largest consumer, has seen demand growth losing some steam for months.

At the same time, supply has improved following several months of shortfalls due to the civil war in Libya. Saudi Arabia, the world’s largest oil exporter, boosted its output to a 30-year high of 9.8m b/d last month. Riyadh, together with Abu Dhabi and Kuwait, have now almost offset the whole gap left by Tripoli. Total Opec production has risen by a hefty 1m b/d to 30.05m b/d in just three months.

Yet the bears do not have the upper hand, at least not yet. And that is reflected in the price. Brent crude, the global benchmark, has fallen from a peak of $127.02 a barrel in mid-April to $104.50 a barrel, but is still up around 10 per cent year-to-date. Goldman Sachs and others, some traders think, could be right this time.

The bulls argue that the market, even weaker than some months ago, does not look to be heading to the precipitous cliff that it hit three years ago, barring an unforeseen event. “The physical oil market looks reasonably supported,” says Daniel Jaeggi, head of oil trading at Mercuria in Geneva, one of the world’s largest oil trading houses. “The demand situation is nowhere near as bad as in 2008-09.”

Back in 2008, oil demand contracted by 600,000 b/d compared with the previous year. And it fell by another 1m b/d in 2009. Today, demand growth may be slowing down, but consumption continues to increase year-on-year.

The IEA has stress-tested its oil demand forecasts to anticipate the impact of a large economic slowdown. Its estimate of 1.2m b/d of extra consumption this year is based on the assumption – too rosy for many – that the global economy expands at a rate of 4.2 per cent. But even if economic growth slows down to 2.8 per cent this year, it forecasts oil demand growth would only slow to 860,000 b/d, still a robust number.

This continuous increase in oil demand, even in an adverse economic scenario, is greater than the expected non-Opec supply growth. As Mr Currie points out, the result is the “oil market continues to draw on inventories and Opec spare capacity.”

The bulls have a further argument which suggests that any correction would be short-lived.

Paul Horsnell, head of commodities research at Barclays Capital, says that the 2008-09 cycle demonstrated that below $90 a barrel, investment in future production capacity dried up. As such, prices need to rebound quickly to guarantee that companies invest enough to meet future oil demand.

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