Rampant oil prices are unsustainable and the market will produce a sharp fall as a host of supply and demand factors build up to send prices lower, argue analysts at Lehman Brothers.

Lehman analysts say that conditions are developing for a sharp correction to the price of oil, which now resembles the rapid rise in prices seen in the dotcom technology bubble of the late 1990s.

“When peak prices hit, we believe they are also likely to fall precipitously. That is the way cyclical turning points tend to occur – in the midst of a market trend, turning points can be sudden, unexpected and severe. If history is a guide, the turning point will come,” they said, before adding, “Getting the timing right is the difficult part.”

The warning coincides with a still-strong theme of investment firms rolling out commodity-themed funds to exploit the bull market in commodities for energy, soft commodities and metals. But a number of institutions have started to argue that the bull market could hit headwinds or even reverse.

The rise in oil prices has certainly proven one of the most dramatic market shifts of the year so far. Last Friday, US crude oil for July delivery traded at around $128 a barrel on the New York Mercantile Exchange and is now up by about 33 per cent since the start of 2008. Oil hit an all-time high of more than $135 per barrel.

The surge in the price has been driven by factors such as the weak dollar, China’s economic growth, restrictions of supplies because of political and military conflicts in the Middle East, Nigeria and Venezuela. The weak dollar has pushed up oil prices, because producers of oil - which is denominated in dollars - lift prices to compensate for losses in earnings caused by dollar weakness. And analysts also argue that speculators and long term investors such as pension funds have also pushed prices up.

But Lehman Brothers says the “astronomic” price rises cannot be sustained. It says high prices will encourage new investment in boosting supplies. It says producers have not been active, allowing warnings that oil output has peaked to hold sway over investor opinion. Among other factors, Lehman says the production capacity potential of OPEC producers is on the upside, not downside, while deepwater sources of oil are robust.

“Our conclusion…is that we are seeing the classic ingredients of an asset bubble. Investors tend to “herd” and chase past performance, comforted by the growing analytical conclusion that markets are tightening, and new inflows, in turn, drive prices higher,” the Lehman report said.

“Through 2009, our analysis indicates that global production capacity should be growing at twice the rate of global demand and through 2010, any incremental surplus capacities developed through 2009 should carry over,” it said.