World Bank: Oil prices below $30 'unwarranted', but forecast still down by 27%

Photo: Getty Images/David McNew

The World Bank has revised its 2016 oil price forecast by more than 27% to $37 a barrel’, down from last October’s forecast of $51.

It says the lower forecast, reflects a number of supply and demand factors including “sooner-than-anticipated 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.”

But the bank says that after a 13% drop in the fourth quarter of 2015, the slide in oil prices below $30 a barrel in mid-January are “somewhat below levels that would appear to be warranted by fundamentals.”

As a result, the bank expects prices to recover in 2017.

From their current lows, a gradual recovery in oil prices is expected over the course of the year, resulting from a number of factors. First, part of the sharp oil price drop in early 2016, which does not appear fully warranted by fundamental drivers of oil demand and supply, is likely to reverse. Second, high-cost oil producers are expected to sustain persistent losses and increasingly implement production cuts that are likely to exceed any additional capacity coming to the market. Third, demand is expected to strengthen somewhat, along with a modest pickup in global growth.

But the recovery the bank anticipates is “forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.”

That’s because during these recoveries “OPEC production cuts contributed to the price recovery.”

The bank says the “currently expected price recovery over the course of 2016 is less than that in the previous episodes owing to large stocks and prospects for continued ample supplies (including from OPEC) and anaemic demand.”

However, against this backdrop the bank says “on balance, the price outlook remains subject to considerable downside risks.”

They warn the risks include:

  • Larger-than-expected increase in Iran’s exports and a possible recovery of exports from Libya;
  • Short-cycle U.S. shale production may again turn out to be more resilient than currently anticipated if companies achieve further productivity gains;
  • Ample supply would particularly weigh on prices if global demand were to also weaken more than expected.

As a result “prices may thus have to fall further to reduce production and investment, especially for short-cycle U.S. shale production.”

Happily there are some upside risks, the bank says. These include “sharper-than-anticipated non-OPEC supply declines and slow expansion of exports from Iran” and the potential for supply disruptions among key OPEC producers (Iraq, Nigeria and the República Bolivariana de Venezuela) due to internal conflict.”

And of course global demand could surprise on the upside.

NOW READ: GOLDMAN SACHS – The violent crash in oil prices is creating ‘real fundamental change’

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.