Oil prices to stay near current level throughout 2016, World Bank says

Powered by Guardian.co.ukThis article titled “Oil prices to stay near current level throughout 2016, World Bank says” was written by Phillip Inman Economics correspondent, for theguardian.com on Tuesday 26th January 2016 15.00 UTC

The World Bank has slashed its forecast for oil prices this year, saying the cost of a barrel of crude will stay near its current lows for the rest of 2016.

The Washington-based institution said a glut of oil that sent prices crashing by almost half last year and another 27% this month will continue to dominate the market for the next year.

It added that warm winter weather in Europe and weaker than expected growth in China and other emerging economies will depress demand and keep the average price at $37 a barrel, down from a projection of $51 last October.

“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 bank’s commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”

The intervention follows a forecast by the International Energy Agency that contributed to panic selling last week and a collapse in the price of Brent crude to $27 a barrel. The report said prices could fall further as new Iranian output cancels out production cuts elsewhere, leading to third successive year when supply exceeded demand by 1m barrels a day.

Officials at the World Bank played down the likelihood of a crash, though they warned in a separate report that a synchronised slowdown in the biggest emerging markets could be intensified by a fresh bout of financial turmoil, tipping the world economy into recession.

Oil prices began to tumble during the summer of 2014 in response to a slowdown in China’s factory output. The country’s manufacturing industry, which in the aftermath of the 2008 financial crash has become the world’s largest single destination for oil and metals, stopped buying commodities at the previous high levels.

Investors expected the major oil producers to cut production in response to falling demand, but instead the Saudi-led Opec nations, Russia and the US oil fracking firms have until recently maintained the flow of crude into world markets.

The World Bank said the market had reached a turning point and the “fundamental drivers of oil demand and supply” are “likely to partly reverse”.

It argued that prices would stabilise below $40 for the rest of the year as high-cost oil producers make production cuts “that are likely to outweigh any additional capacity coming to the market”. A modest pickup in global growth would also prevent a further slump.

Beyond oil markets, the prices for commodities are expected to be weighed down by a plentiful supply of food and metals amid slowing demand in emerging market economies. In all, prices for 37 of the 46 commodities monitored by the World Bank were revised lower for the year.

“Emerging market economies have been the main sources of commodity demand growth since 2000. As a result, weakening growth prospects in these economies are weighing on commodity prices. A further slowdown in major emerging markets would reduce trading partner growth and global commodity demand,” it said.

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