World Bank’s positive commodities price forecast: Too optimistic?

The World Bank in its April Commodity Markets Outlook released recently is forecasting higher prices for industrial commodities, principally energy and metals, for 2017 and 2018. Analysts at the World’s top bank see crude oil price holding steady at $55 per barrel, increasing to an average of $60 per barrel in 2018.

As basis, it believes that rising oil prices, supported by production cutbacks by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC states, will allow markets to gradually rebalance.

It, however, concedes that these oil price forecasts are subject to downside risks should the rebound in the US shale oil industry be greater than expected.

The World Bank also sees prices for energy commodities, which also include natural gas and coal, projected to jump 26 percent this year and 8 percent in 2018. In line with oil price forecasts, it anticipates natural gas to gain 15 percent this year, led by a jump in US prices. Coal is seen climbing 6 percent in 2017, due to earlier supply restrictions in China, which consumes half the world’s coal output.

Prices for non-energy commodities, which include agriculture, fertilizers, metals and minerals, are forecast to increase in 2017, the first rise in five years. Metals prices are projected to jump 16 percent this year due to strong demand, especially from China, and supply constraints, including mine disruptions in Chile, Indonesia and Peru.

This forecast agrees in large measure with the view of analysts that oil prices will see modest recovery. According to the IEA’s monthly report for April, global demand growth is poised to fall for a second consecutive year as a result of subdued gains, most notably in Russia and India. The IEA forecast global demand growth of 1.3 million barrels per day (bpd) after low demand for oil from investors in the first three months of 2017.

“It is now halftime for the six-month oil production cuts agreed by OPEC and eleven non-OPEC countries. So far, the game has gone fairly well for producers,” the Paris-based organization said in the report published April 13.

OPEC cut output by around 1.2 million barrels per day bpd from January 1 for six months in order to remove a supply glut. Eleven other non-OPEC countries, including Russia, agreed to limit supply by half as much.

The IEA said that for OPEC countries, compliance has been impressive from the start while non-OPEC participants are gradually increasing their compliance rate, although in their case it is harder for analysts to verify the data.

Hence the World Bank’s forecast is largely contingent on sustaining current cooperation among OPEC producers and non-producers. Some analysts already think that crude will likely drop to $40 a barrel or below if the output cutbacks are not extend beyond June.

While the six-month cuts that took effect in January have set a floor for prices, an increasing supply of US shale oil together with record-high inventories are keeping the per-barrel price of crude from rising to $60 the price OPEC members needs to boost earnings and maintain market share.

The World Bank’s Commodity Markets Outlook provides detailed market analysis for major commodity groups, including energy, metals, agriculture, precious metals, and fertilizers. The report includes price forecasts to 2030 for 46 commodities and provides historical price data.

ISAAC ANYAOGU