The oil producing countries with higher cost may need to brace up for further cost efficiency, as indications emerged that the crude oil prices may crash further by 27 per cent this year.
The latest report by the World Bank lowered its 2016 forecast for crude oil prices to $37 per barrel from $51 per barrel in its earlier (October) projections.
Brent crude settled at $29.50 Tuesday, while OPECs daily basket price fell to 25.58 a barrel.
According to the Commodity Markets Outlook report, a number of supply and demand factors, such as resumption of exports by the Islamic Republic of Iran; greater resilience in U.S. production due to cost cuts and efficiency gains; a mild winter in the Northern Hemisphere; and weak growth prospects in major emerging market economies, play major role in the cheap oil era.
“Oil prices fell by 47 per cent 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,” it stated.
Meanwhile, the anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.
Senior Economist and lead author of the Commodities Markets Outlook, John Baffes, 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 raise slightly over the next two years, significant downside risks remain.”
Beyond oil markets, the World Bank said 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.
Director of the World Bank’s Development Prospects Group, Ayhan Kose, said: “Low commodity prices are a double-edged sword, where consumers in importing countries stand to benefit while producers in net exporting countries suffer. 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.
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.