World Bank slashes oil price forecast to $37 a barrel

The World Bank on Tuesday dramatically revised down its forecast for crude oil prices, predicting they would average just $37 a barrel this year and warning commodity markets to brace themselves for the possibility of a much sharper than expected slowdown in emerging economies.

The new forecast — down from a predicted $52 average for 2016 just three months ago — underlines how rapid the recent fall in oil prices has been and the growing concerns at the World Bank and elsewhere over the link between tumbling oil and the health of emerging economies.

The bank’s quarterly Commodity Markets Outlook also contained a grim warning about the fragility of the global economy and the potential for a deteriorating picture in many emerging economies.

The bank revised down its growth forecast for emerging and developing economies to 4 per cent this year, from an expected 4.6 per cent previously, and warned the prediction was “subject to considerable downside risks in a fragile global environment”.

The biggest risk, it said, was a sharper than expected slowdown this year in China and other big commodity-importing emerging economies that would inevitably hit others.

Research had shown that a 1 percentage point drop in China’s growth could yield a decline in average commodity prices of 6 per cent after two years, although industrial metals would likely be hit harder than oil.

Even without a worse than expected slump in emerging economies “many of the factors underpinning the slowdown in recent years — including low commodity prices, weak global trade and slow productivity growth — are expected to persist”, the bank’s economists wrote.

Moreover, the deteriorating growth prospects in many emerging economies were eroding their fiscal and monetary policy buffers, the bank said, “leaving many countries more susceptible to external shocks”.

The bank predicted a 25 per cent fall in energy prices from 2015, which at $50.80 a barrel saw the lowest average crude prices recorded since 2004.

But it said it expected a gradual recovery over the year.

The sharp oil price drop in the first few weeks of this year “does not appear fully warranted by fundamental drivers of oil demand and supply”, the bank’s economists wrote, while losses at higher-cost oil producers could bring production cuts.

Then again, that forecast too was subject to “significant downside risks”, they said.