World Bank sees slow rebound for crude prices

The World Bank has lowered its 2016 global crude price forecast by $15/bl to $37/bl and projects a much slower recovery from the present lows than from previous periods of sharp price declines.

The lower price forecast in part reflects the resilience in US shale production as a result of cost cuts and efficiency gains and the sooner-than-expected return of Iran to global oil markets, the World Bank said today in its quarterly Commodity Markets Outlook.

World Bank economists also noted a mild winter in the northern hemisphere and weak growth prospects in major emerging economies among the reasons for slashing the crude forecast. The crude forecast represents an equally weighted average of Brent, West Texas Intermediate (WTI) and Dubai prices.

The rebound trajectory for crude prices should be more flat than the upward movements that followed market price lows in 1986, 1998 and 2008, the World Bank said. In previous declines, prices rose by 50pc within five months of reaching a low and almost doubled within 12 months. But large inventories, weak demand growth and prospects for continuing robust supply, including from OPEC, will continue to pressure the price, World Bank economists said.

The 2016 crude forecast would amount to a 27pc year-over-year decline in price. That followed a 47pc decline last year when crude prices reached their lowest level since 2004.

The lower forecast by the World Bank follows similar projections by major banks as crude oil prices tumbled since late December. The slide is "somewhat stronger than warranted by fundamentals," the World Bank said. It cited continued ample supply from the US and other non-OPEC producers, high stocks and OPEC's resolve to defend market share among possible explanations.

The forecast is subject to more downward pressure while risks to the upside are fewer, the World Bank said. A larger than expected increase in Iranian crude production and a possible recovery in Libyan exports could again push the price down. So could further productivity gains among US shale producers and a weakening in global demand. By contrast, supply shocks in Iraq, Venezuela and Nigeria because of internal conflicts could cut global supply and help reduce the high inventories.

The World Bank outlook projects a 1.3pc increase in global demand to 95.7mn b/d this year, following a 1.8pc growth rate in 2015. The lower projected growth rate reflects a smaller projected boost in demand from further declines in prices. Non-OECD oil consumption should increase by 1.2mn b/d, or 2.4pc. OECD demand should remain flat as a slight increase in US crude demand will be offset by declines in other major developed economies.

The outlook expects a neutral effect from the lifting of restrictions on US crude exports, noting limitations on port infrastructure and the fact that the US still imported more than 7mn b/d in 2015. But the availability of US crude for export should hold the WTI-Brent differential near export transport costs, which the World Bank estimated at $3/bl based on futures prices in mid-January.