KAMPALA. The World Bank Group is lowering its 2016 forecast for crude oil prices to $37 (Shs128,400) per barrel from $51 (Shs177,000) in its October 2015 projections.
The projected low prices have two implications for Uganda: saving the country from high oil import bills, or slowing down investment in Uganda’s oil industry which is yet to reach the production stage.
Bank of Uganda (BoU), in its monetary policy report in December last year, said decline in oil prices, reduction of imports by both the government and the private sector saw the value of imported goods declining by $153.7m (Shs533.6b) in the first quarter of the financial year 2015/16, which covers July to October. This means that the country spent less on imports in the first quarter of the 2015/16 financial year.
As per the report, Uganda’s Balance of Payment position, the value of imported goods fell by 9.2 per cent in the same period, from $1.680b (Shs5.8 trillion) to $1.527b (Shs5.3 trillion), due to the decline in the value of oil imports, which declined by 34 per cent, reflecting the decline in international oil prices. In the report, BoU executive director research Adam Mugme said non-oil private sector imports declined by 8.2 per cent, from $1.245b (Shs4.3 trillion) to $1.144b (Shs3.97 trillion), which could be reflective of the declining private sector demand as well as the impact of global disinflation.
The World Bank explains in its latest Commodity Markets Outlook report that the lower forecast reflects a number of supply and demand factors. These include sooner than anticipated resumption of exports by Iran, greater resilience in US production due to cost cuts and efficiency gains, a mild winter in the Northern Hemisphere, and weak growth prospects in major emerging market economies.
The trends
Oil prices fell by 47per cent in 2015 and are expected to decline, on an annual average, by another 27 per cent in 2016. However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.
First, the sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse. Second, high-cost oil producers are expected to sustain persistent losses and increasingly make production cuts that are likely to outweigh any additional capacity coming to the market. Third, demand is expected to strengthen somewhat with a modest pickup in global growth.
However, the bank stresses that the anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.
“The price outlook remains subject to considerable downside risks. Low prices for oil and commodities are likely to be with us for some time .While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain,” said Mr John Baffes, a senior economist and lead author of the Commodities Markets Outlook.
Beyond oil markets, the report said all main commodity price indices are expected to fall in 2016 due to persistently large supplies, and in the case of industrial commodities, slowing demand in emerging market economies. This, for Uganda will lead to low earnings from commodity exports.
moketch@ug.nationmedia.com
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