World Bank sees US$41 oil this year, but cuts outlook for other commodities

Tokyo

THE World Bank is raising its 2016 forecast for crude oil prices to US$41 per barrel, up from the US$37 per barrel forecast at the start of this year, in view of "improving market sentiment and a weakening dollar".

This forecast of firming energy prices, made in the World Bank's latest edition of its Commodity Markets Outlook, is thus positive for producing countries in Asia and elsewhere, and also for central banks struggling to reverse persistent deflationary trends in their economies.

The bank's outlook for other commodities, however, is less bright.

John Baffes, senior economist and lead author of the report, said: "We expect slightly higher prices for energy commodities over the course of the year, as markets rebalance after a period of oversupply."

The crude oil market rebounded from a low of US$25 per barrel in mid-January to US$40 per barrel this month, following production disruptions in Iraq and Nigeria and a decline in non-OPEC (Organization of the Petroleum Exporting Countries) production, mainly in US shale, the report noted.

At the same time, it cautioned that a proposed production freeze by major producers failed to materialise at a meeting in mid-April, and that energy prices could fall further "if OPEC increases production significantly and non-OPEC production does not fall as fast as expected".

Energy prices, including oil, natural gas and coal, are now forecast by the World Bank to fall by 19.3 per cent in 2016 from the previous year - a more gradual drop than the 24.7 per cent slide forecast in January.

By contrast, however, the prices of non-energy commodities such as metals and minerals, agriculture and fertilisers are expected to decline by 5.1 per cent this year, a steeper decline than the 3.7 per cent drop forecast by the bank in January.

The report said: "All main commodity indexes tracked by the World Bank are expected to decline in 2016 from the year before."

This is due to "persistently elevated supplies and, in the case of industrial commodities (which include energy, metals and agricultural raw materials), weak growth prospects in emerging market and developing economies".

Metals prices are projected to fall 8.2 per cent in the coming year, less than the 10.2 per cent drop forecast in January, reflecting expectations of stronger demand growth by China.

Agriculture prices are forecast to fall more than projected in January, in what is expected to be another favourable harvest year for most grain and oilseed commodities; agricultural commodities prices are also pulled down by lower energy costs.

"Low commodity prices are undermining growth prospects for many resource-rich countries which experienced a surge in exploration, investment and production during the commodities boom of the 2000s," the report said.

"Countries that have borrowed and invested heavily in anticipation of faster growth may struggle to service their debt and sustain investment when growth disappoints as a result of lower commodity prices."

With oil and metals prices today 50 per cent to 70 per cent lower than their early 2011 peaks, natural resource development projects have already been put on hold or delayed in several emerging and developing countries, the report noted.

Ayhan Kose, director of the World Bank's Development Prospects Group, said: "These project delays can adversely affect countries that can ill-afford such setbacks. Greater transparency, improved government efficiency and improvements in macroeconomic frameworks could soften such disruptions."