Oil Price Forecast Revised Higher After Supply Disruptions in Second Quarter

July 26, 2016

The World Bank is raising its crude oil price forecast for 2016 to $43 a barrel from $41 dollars after oil prices jumped 37 percent in the second quarter due principally to disruptions to supply, particularly wildfires in northwestern Canada and sabotage of oil infrastructure in Nigeria.

Nevertheless, oil prices are still anticipated to be 15 percent lower this year than in 2015 because of large inventories, which will take some time to work off, the July Commodity Markets Outlook says. The revised forecast takes into account a recent softening of demand for oil and the recovery of some disrupted supply.

Most main commodity price indexes are expected to decline for the year as a whole due to large supplies and, in the case of industrial commodities, weak growth prospects in emerging market and developing economies.  Even so, the declines of many commodities are now forecast to be less steep than anticipated in the April outlook.

Post-2011 commodity price declines haves weighed heavily on growth prospects for commodity exporting emerging market and developing economies, which are home to more than half the world’s  poor. The indirect impact of slowing growth in energy and metal exporting emerging market and developing economies may outweigh the direct benefits of lower consumer prices.

Agriculture prices are projected to fall more gradually than forecast in April. The outlook reflects adequate supplies for most commodities but also takes into account reduced harvests in South America. Agricultural commodity prices are also expected to be held down by lower energy costs and plateauing demand for biofuels.

Food prices as a whole are expected to rise moderately in 2016, but grains and beverages prices are forecast to fall while oils and meals prices are projected to rise. Fertilizer prices are projected to tumble in 2016 due to surplus capacity and weak demand, among other factors.

Metals prices are expected to fall more sharply than expected in April due to weak demand and the coming on line of new capacity.  Precious metals prices were revised sharply upward on safe-haven buying amid worries about global growth prospects. For 2017, a modest recovery is projected for most commodities as demand strengthens and supply tightens.

The quarterly report also examines the key role energy prices play in the determination of food prices. The post-2006 boom of food prices was partly driven by higher energy costs, and the weakness in energy prices since 2014 is expected to hold food commodity prices down in the future as well.

Agriculture is energy intensive: fuel is a key cost component of producing and transporting food commodities. While improved overall crop conditions have also played a part in lowering prices, the impact of lower energy prices has been far greater.

Energy prices fell 45 percent in 2015 and are forecast to drop 16 percent this year. Food prices are expected to average 26 percent below highs reached in 2011. Not only does energy make up more than 10 percent of the cost of agricultural production, energy price fluctuations affect incentives and policy support for the production of biofuels as an alternative energy source to oil.

The diversion of some food crops to biofuels production has been an important driver of food commodity demand. During the past decade, the largest source of growth in demand for grains and oilseeds was biofuels production.

In addition to energy costs, agriculture prices are also affected by exchange rates movements, GDP and monetary conditions, and stock-to-use ratios (measures of how well supplied food markets are relatively to demand).

Scrutiny of these drivers helps explain declines in food prices after 2011. Maize prices have fallen in that period by 43 percent, wheat by 42 percent, rice by 25 percent, and soybeans fell by 23 percent. About one-third of this decline can be explained by the oil price drop.  One-sixth of the decline is attributable to a rise in incomes during that period.