The lower 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, according to the World Bank’s latest quarterly report.
Oil prices fell by 47% in 2015 and are expected to decline, on an annual average, by another 27% in 2016. However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.
First, 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. Second, 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. Third, demand is expected to strengthen somewhat with a modest pickup in global growth.
The anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986. The price outlook remains subject to considerable downside risks.
John Baffes, senior economist and lead author of the Commodities Markets Outlook, said: “Low prices for oil and commodities are likely to be with us for some time. While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”