ISLAMABAD: Global commodity prices are set to tumble to a five-year low in 2025 amid an oil glut that is so large that it is likely to limit the price effects even of a wider conflict in the Middle East, said the World Bank on Tuesday.

In its latest Commodity Markets Outlook (CMO), the bank said that despite this drop, the overall commodity prices will remain 30 per cent higher than they were in the five years before the Covid-19 pandemic.

While price projections across individual commodities are mixed, a major factor underlying the overall decline is improving supply conditions. This, coupled with expectations of moderate global economic growth, gives rise to generally modest expected price movements, except where individual markets are responding to commodity-specific developments, the report observed.

The global oil supply next year is expected to exceed demand by an average of 1.2 million barrels per day, a glut that has been exceeded only twice before — during the pandemic-related shutdowns in 2020 and the 1998 oil-price collapse, the World Bank said, adding that the new oversupply partly reflected a major shift in China, where oil demand had essentially flatlined since 2023 amid a slowdown in industrial production and an increase in sales of electric vehicles and trucks powered by liquefied natural gas (LNG).

Oil glut likely to limit price effects even of wider Mideast conflict

In addition, several countries that are not part of the Organisation of Petroleum Exporting Countries or its allies (OPEC+) are expected to ramp up oil production. OPEC+ itself maintains significant spare capacity, amounting to 7m barrels per day, almost double the amount on the eve of the pandemic in 2019.

From 2024 through 2026, global commodity prices are projected to plummet by nearly 10pc, the CMO said. “Global food prices are set to fall 9pc this year and an additional 4pc in 2025 before leveling off. That would still leave food prices nearly 25pc above the average level from 2015 through 2019,” it added.

Energy prices are expected to drop by 6pc in 2025 and an additional 2pc in 2026. Falling food and energy prices should make it easier for central banks to control inflation. However, an escalation in armed conflicts could complicate that effort by disrupting energy supply and driving up food and energy prices.

Over the past year, conflict in the Middle East has brought significant volatility to oil prices — particularly because of concerns that the oil and gas infrastructure of major commodity producers could be damaged if the conflict were to intensify.

Assuming the conflict does not intensify, the annual average price of Brent crude is expected to fall to a four-year low of $73 in 2025, down from $80 a barrel this year.

But the report also assesses what might happen if the conflict were to escalate, specifically if it resulted in reducing the global oil supply by 2pc, or 2m barrels per day, by the end of this year — a scale of disruption that occurred with the Libyan civil war in 2011 and the Iraq war in 2003. If a similar disruption were to recur, Brent prices would initially rise sharply to a peak of $92 a barrel.

Published in Dawn, October 30th, 2024