The FINANCIAL — The World Bank is lowering its 2015 forecast for crude oil prices to $52 per barrel from $57 per barrel in July on economic weakness and expectations of a jump in Iranian oil exports after international sanctions are lifted, according to the Bank’s latest Commodity Markets Outlook, a quarterly update on the state of the international commodity markets.
The Bank’s Energy Price Index tumbled 17 percent in the third quarter of 2015 from the previous period, led by a 19 percent plunge in oil prices prompted by expectations of slower global growth, particularly in China and other emerging markets, and supply considerations. Coal and natural gas prices both fell 3 percent in Q3. The Bank expects energy prices to average 43 percent lower in 2015 than the previous year as oil supply continues to outpace demand. Natural gas prices are expected to register declines in all three main markets and coal prices are also expected to slip on slowing import demand from China.
For commodities excluding energy, the World Bank reports a 5 percent decline in prices in Q3, and forecasts that non-energy prices will register a 14 percent decline from the previous year’s levels.
“A five-year-long slide in most commodity prices continued in the third quarter. Both ample supplies and weak demand, especially for industrial commodities, contributed. Price weakness is expected to persist for the rest of the year,” said John Baffes, Senior Economist and lead author of Commodity Markets Outlook.
Downside risks to the energy-price forecast include higher-than-expected OPEC production and continuing falling costs and improved productivity of the U.S. shale oil industry. Slowing demand and high stocks could further weigh on oil prices. Upside risks include accelerating declines in shale output, delayed implementation of the Iran nuclear agreement, and supply curtailment because of geopolitical events.
A special feature assesses the impact of El Nino on commodity markets. Despite what is expected to be one of the strongest El Nino episodes on record, the weather pattern is unlikely to cause a spike in global agricultural prices because of the ample supply of major agricultural commodities, weak links between global and domestic prices, and the limited impact of past episodes. However, it could be a source of significant local disruptions in the most affected regions, the Outlook finds.
Thus far, both global and domestic prices of key rice grains have not increased, even in countries at risk from El Nino. The weather pattern — which affects winds and water temperatures of the Pacific Ocean and changes precipitation levels, especially in the Southern Hemisphere — is likely to have a greater impact on more isolated local food markets that are not linked to international markets. Weather disturbances tend to have a robust short-run impact on local prices in a significant number of maize markets in developing countries.
A special box examines possible effects of the Iran Nuclear Agreement on energy markets. Within a few months of being lifted, Iran could increase crude oil production by 0.5-07 million barrels per day (mb/d), potentially reaching a 2011 pre-sanctions level of 3.6 mb/d. Iran could immediately begin exporting from its 40 million barrels of floating storage of oil.
Over the longer term, Iran has the potential to produce and export significant volumes of natural gas. The country has the world’s largest known reserves, comprising 18 percent of the global total, and could over time develop gas export capacity via pipelines to Europe via Turkey, and eventually transport liquefied natural gas to Europe and Asia.
“While the impact of Iranian oil exports on global markets is expected to be relatively small in the short term, it could be much larger eventually if Iran can attract the necessary foreign investment and technology to utilize its substantial reserves. The short term impact of Iran’s exports on regional natural gas prices will depend on market conditions, but given the extent of its natural gas reserves, Iran has the potential to become a significant producer and exporter over the medium term,” said Ayhan Kose, Director of the World Bank’s Development Prospects Group.
The Outlook provides detailed market analysis for major commodities groups, including energy, metals, agriculture, precious metals and fertilizers. The report finds:
Metals prices fell 12 percent in Q3, the fourth consecutive quarterly decline, reflecting slowing demand, notably from China and other emerging economies and weak global indicators for industrial production and manufacturing. Metals prices are projected to decline by 16 percent in 2015 due to increases in new production capacity and slowing demand growth in China.
Precious metals prices fell 7 percent in Q3 and are projected to slide 8 percent in 2015 on lower investment demand.
Agricultural commodities fell by 3 percent in the quarter and are forecast to fall by 13 percent in 2015, reflecting abundant supplies and high levels of grain stocks.
Fertilizer prices fell 1 percent in Q3, and are projected to decline by 1 percent in 2015, because of weak demand, rising supply and destocking.