World Bank lowers oil price forecast, warns of continued weakness

Tokyo

THE World Bank has lowered its forecast dramatically for crude oil prices this year to US$37 per barrel, compared with the US$51 it forecast last October. But it is projecting that prices will recover somewhat in 2016 from current ultra-lows.

The revised forecast contained in the bank's latest Commodity Markets Outlook comes as the price of benchmark Brent Crude oil is swinging sharply in the lower US$30 a barrel range.

"Low prices for oil and commodities are likely to be with us for some time," said John Baffes, senior economist and lead author of the World Bank quarterly publication. "While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain."

The World Bank said that its latest forecast reflects a number of supply and demand factors.

These include "sooner-than-anticipated resumption of exports by (Iran), greater resilience in US production due to cost cuts and efficiency gains, a mild winter in the Northern Hemisphere, and weak growth prospects in major emerging market economies".

Oil prices fell 47 per cent in 2015 and are expected to decline, on an annual average, by another 27 per cent in 2016 from their level at the end of last year, said the bank. "However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.

"The sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse. High-cost oil producers are expected to sustain persistent losses and increasingly make production cuts that are likely to outweigh any additional capacity coming to the market.

"Demand is expected to strengthen somewhat with a modest pickup in global growth."

The projected oil price recovery is, however, forecast to be smaller than the rebounds that followed sharp falls in 2008, 1998 and 1986, and "the price outlook remains subject to considerable downside risks", the World Bank warned.

Crude oil futures pared gains in late trading on Tuesday, after American Petroleum Institute data showed crude oil inventory had a larger-than- usual weekly build, The Wall Street Journal reported.

US oil inventories increased by 11.4 million barrels in the latest week, the Journal reported. "This is a mega build," the paper quoted John Kilduff, a partner with Again Capital in New York, as saying. "Inventories will only get larger from here."

Oil prices rose as much as 6 per cent on Tuesday, sending both Brent and US crude briefly above US$32 a barrel, on hopes that Opec (the Organization of the Petroleum Exporting Countries) and other producers were moving closer to an agreement to reduce output in the face of a supply glut.

Opec has renewed calls for rival producers to cut supply alongside its members - but Russia, seen as key to any deal, has resisted so far.