Oil prices fell by 47 percent in 2015 and are expected to decline, on an annual average, by another 27 percent 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.
“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 Commodities Markets Outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”
Beyond oil markets, all main commodity price indices are expected to fall in 2016 due to persistently large supplies, and in the case of industrial commodities, slowing demand in emerging market economies. In all, prices for 37 of the 46 commodities the World Bank monitors 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.
“Low commodity prices are a double-edged sword, where consumers in importing countries stand to benefit while producers in net exporting countries suffer,” said AyhanKose, Director of the World Bank’s Development Prospects Group. “It takes time for the benefits of lower commodity prices to be transformed into stronger economic growth among importers, but commodity exporters are feeling the pain right away.”
Non-energy prices are expected to slip 3.7 percent in 2016, with metals dropping 10 percent after a 21 percent fall in 2015, due to softer demand in emerging market economies and gains in new capacity. Agriculture prices are projected to decline 1.4 percent, with decreases in almost all main commodities groups, reflecting adequate production prospects despite fears of El Niño disruptions, comfortable levels of stocks, lower energy costs, and plateauing demand for biofuel.