World Bank: Oil Prices Will Decrease by 27 Percent This Year

The World Bank, in its latest quarterly report on commodity market outlook, has reduced its forecast for crude oil prices in 2016 by $14 compared to its previous report. According to the report published on Tuesday, January 25, 2017, on the official World Bank website, the price of oil this year is expected to be $37 per barrel. In its previous report released three months ago, the institution had predicted that oil prices would be around $51 in 2016. This decrease reflects certain supply and demand factors, including the earlier-than-expected return of Iranian oil to the market, increased U.S. oil production due to cost reductions and efficiency improvements, a mild winter in the Northern Hemisphere, and weak economic growth in emerging markets. The report states that oil prices fell by about 47 percent in 2015 and are expected to decrease by 27 percent in 2016 as well. Nevertheless, a relative improvement in oil prices throughout the year is anticipated for several reasons. First, the sharp decline in oil prices at the beginning of 2016 does not seem to be entirely due to supply and demand factors. Second, high-cost producers will continue to incur losses and will reduce production. Third, demand is expected to increase due to slight growth in the global economy. The expected improvement in oil prices is predicted to be less than what occurred following the sharp price drops in 2008, 1998, and 1986. John Baffes, the senior economist and lead author of the commodity market outlook report, says, 'Low oil and commodity prices will remain for some time. Although prices are expected to rise somewhat over the next two years, the serious risk of price declines still remains.' Alongside the oil market, other commodity price indices are also expected to decrease due to ongoing oversupply in 2016. In the case of industrial commodities, reduced demand in emerging markets is causing this. Overall, the World Bank has predicted that the prices of 37 out of 46 commodities will decrease further this year. Emerging market economies have been the main source of commodity demand growth since 2000. As a result, the outlook for weakening growth in these economies affects commodity prices. Further slowing in emerging markets will lead to reduced trade growth and global commodity demand. Ayhan Kose, director of the World Bank's Development Prospects Group, states, 'Low commodity prices are like a double-edged sword because consumers in importing countries benefit while producers in exporting countries suffer. Economic growth from importing low-priced goods in importing countries takes time, but exporters feel the loss quickly.' Non-energy commodity prices are expected to decrease by about 3.7 percent in 2016. For example, metal prices, after falling by 21 percent in 2015 due to reduced demand in emerging economies, are expected to drop by 10 percent in 2016. Agricultural product prices are expected to decline by approximately 1.4 percent across almost all groups, indicating sufficient production forecasts despite concerns over El Niño damage, reliable reserves, low energy costs, and steady demand for biofuels.