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By Bloomberg

It’s going to take a prolonged slump in commodities to break a cycle of too much money and excess production, according to Goldman Sachs Group Inc.

The market is caught in a “negative feedback loop,” where lower raw-material prices are strengthening the dollar and lowering production costs for countries with weaker currencies, Goldman analysts wrote in a report. That boosts the prospects of higher U.S. interest rates and a reduction in emerging-economy debt, according to the bank. Demand for commodities will subsequently decline, capping prices and further reinforcing the greenback, it said.

“Commodity markets still have access to far too much capital relative to future demand and a declining cost structure,” analysts including Jeffrey Currie in New York wrote in the note. “Long-term surpluses in most commodity markets require prices to remain lower for longer to balance both the near-term physical supply and demand, but more importantly, the longer-term supply and demand for capital to fund future investments.”

If longer-term prices don’t decline further to restrict capital, the availability of funds will exacerbate the market oversupply, the bank said. That will force prices to a level where it’s no longer viable to keep producing, according to Goldman.

The Bloomberg Commodity Index of 22 raw materials has slid 4.5 percent this week, taking 2015’s decline to almost 7 percent. That’s after the measure rebounded in April to June for its first quarterly increase in a year.

The dollar has climbed 5.5 percent in 2015, with the greenback reaching a record high in March against a basket of 10 major currencies.

U.S. Drilling

Energy markets are particularly susceptible to the cycle. The rebound in oil to $60 a barrel has helped boost U.S. drilling and is also providing incentives for low-cost producers such as the core members of OPEC and Russia to increase current and future output, the bank said in the report.

U.S. drillers added rigs to fields last week for the first time since December, while the Organization of Petroleum Exporting Countries boosted output in June to the highest level since August 2012 as Iraq pumped at a record pace. American crude production is forecast to climb to a 45-year high this year, according to the Energy Information Administration.

West Texas Intermediate for August delivery fell as much as 87 cents to $51.46 a barrel in electronic trading on the New York Mercantile Exchange on Wednesday, extending its slide from a three-month low. Copper in London has dropped 14.6 percent this year.