The latest edition of the World Bank’s Commodity Markets Outlook was published on January 26, 2016. The next edition will be published tomorrow at 3:00 pm EST!

Commodity prices (“pink sheet”) are updated on the third business day of each month (the next update will be posted on May 4, 2016).

www.worldbank.org/commodities

World Bank, Commodity Markets Outlook, Various Special Focus sections (including, China’s and India’s role on commodity consumption, the nature of the four oil price plunges, Effects of El Nino on commodity prices, the effect of EMDEs growth slowdown on commodity markets, Iran’s role in energy markets).

Baffes, J. (2007). “Oil spills on other commodities.” Resources Policy, 32 (3), 126-134. Baffes, J. (2013). “A framework for analyzing the interplay among food, fuels, and biofuels.” Global Food Security, 2 (2), 110-116. Baffes, J. and X.L. Etienne (2016). “Analyzing food price trends in the context of Engel’s Law and the Prebisch-Singer Hypothesis.” Oxford Economic Papers,

doi:10.1093/oep/gpw011 Baffes, J. and T. Haniotis (2016). “What explains agricultural price movements?” Journal of Agricultural Economics, forthcoming.

Questions

30

60

90

120

150

180

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15

Index, nominal terms, 2010 = 100

Virtually all commodity prices declined after 2011Q1, but oil

Source: World Bank Note: Last observation is March 2016

Energy

Agriculture

Metals

-70 -60 -50 -40 -30 -20 -10 0 10

Crude oilWheatTeaGoldCocoaSoybeansZincPlatinumLeadTinRiceMaizeCoffee (arabica)AluminumPalmoilCopperNickelSilverCoalCottonNatural rubber

Indeed, oil was the outlier, out of all major commdities! Why?

Source: World Bank Price change from 2011Q1 to 2014Q2 (percent)

20

40

60

80

100

120

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16

The four acts of oil

Oil production increases sharply but “losses elsewhere” along with OPEC’s production quotas balance the market thus keeping prices high, despite downward revisions of growth prospects

The “oil glut”

OPEC disengages from supply management

Search for equilibrium

Source: World Bank

I 100-110

II 100

75

III 75

50

US$/bbl IV 50

??

Global growth: Pessimist in the short term

6.1 6.0

5.7 5.5 5.4

5.5 5.3

4.8 5.0

5.4

5.0

4.3

3

4

5

6

7

2012 2013 2014 2015

Forecast in January of previous year Forecast in January of current year Actual growth

Percent

Source: World Bank, Global Economic Prospects Notes: Growth refers to developing countries.

Source: World Bank calculations based on Consensus data. Note: Weighted average growth October forecasts for 46 countries for which long-term consensus forecasts are available.

Pessimistic Long-Term Growth Forecasts:

Prolonged Period of Weakness?

3.9

2.6

7.3

2.9

2.0

5.5

0

2

4

6

8

World Advanced Economies Developing Economies

Forecast in 2010 Forecast in 2015

But also pessimism in the long term

Consistent upward revisions to U.S. oil production by IEA

Source: International Energy Agency and World Bank Note: U.S. oil output includes biofuels. Last observation is December 2015.

7

8

9

10

11

12

13

J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2010 2011 2012 2013 2014 2015

Solid lines: Actual for the year

Dots: Projected for the year on the specific month

2012

2013

2014

2011

Million barrels per day 2015

And by EIA as well

Source: Energy Information Agency and World Bank Note: Last observation is December 2015.

5

6

7

8

9

10

J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2010 2011 2012 2013 2014 2015

Solid lines: Actual for the year

Dots: Projected for the year on the specific month

2012

2013

2014

2011

Million barrels per day

2015

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: IEA, BP Statistical Review, and World Bank estimates.

Biofuels and Canadian oil production mb/d

mb/d Canadian oil production Global biofuel production

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Surplus conditions became apparent in 2014Q2

Source: International Energy Agency and World Bank Note: Last observation 2015Q4

Mb/d, changes since 2010Q4

-3.0

-1.5

0.0

1.5

3.0

4.5

2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1

Iran Libya Syria Yemen United States Net Changes

Source: IEA

Triger I: Geopolitical concerns dissipate

3.09

3.60 3.26 3.32 3.42

3.17 3.15 3.11 3.36 3.32 3.41

3.70

0.50

0.36

0.22 0.22 0.22

0.24 0.42 0.53

0.78 0.87 0.69 0.44

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Iraq's oil production during 2014 Libya's oil production during 2015

70

75

80

85

90

95

100

20

40

60

80

100

120

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Triger II: The U.S. dollar begins appreciating

Source: World Bank and FRED. Note: Oil refers to WTI and US$ is the trade weighted U.S. dollar index against major currencies, not seasonally adjusted (DTWEXM), both daily frequency

Oil price [left]

U.S. $ [right]

US$/bbl Index, 1973 = 100

OPEC’s changing objective

Following the East Asian financial crisis when oil dropped below $10/bbl, OPEC began setting a price target range, initially at $20-25/bbl and gradually reaching $100-110/bbl.

In the face of weakening demand and increasingly strong supplies from unconventional sources, OPEC decided not to cut production in order to defend market share (November 27, 2014). An earlier, similar (albeit delayed) move was taken in 1985/86.

The decision most likely reflects the realization that global commodity markets cannot be “managed” for long, regardless the nature of the commodity. Artificially maintaining high and stable prices not only attracts suppliers not bound by the agreements but also encourages development of substitute products. Examples abound: International Tin Agreement, 1954-85: It had two implications: (i) Artificially high tin prices

made non-member producers more competitive; (ii) it encouraged the use of aluminum, a substitute product. International Coffee Agreement, 1962-89: It attracted new (non-member) producers,

including Vietnam, which is now world’s second largest coffee supplier.

The four great oil plunges

Source: World Bank Note: Last observation is April 2016

0

30

60

90

120

150

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US$/bbl, deflated by U.S. CPI (2014 terms)

OPEC changes policy to regain market share Price drops 66% in 82 days

First Gulf war Price drops 48% in 71 days

2008 financial crisis Price drops 77% in 113 days

OPEC changes policy to defend market share Price drops 51% in 83 days

1965-2015 average price: $48.32/bbl

Two of which are similar

Source: World Bank Note: Last observation is April 2016

0

30

60

90

120

150

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US$/bbl, deflated by U.S. CPI (2014 terms)

Two of which share three remarkable similarities:

1985/86 & 2014/15

Both materialized after a period of high prices

Source: World Bank Note: Last observation is April 2016

0

30

60

90

120

150

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US$/bbl, deflated by U.S. CPI (2014 terms)

Both came after a period of high prices, in part supported by OPEC: December 1978-January 1986: $82/bbl August 2004-December 2014: $92/bbl 50-year average (excluding the above

periods): $29/bbl

In both case high prices brought new supplies

Source: World Bank Note: Last observation is April 2016

0

30

60

90

120

150

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US$/bbl, deflated by U.S. CPI (2014 terms)

In both periods, high oil prices brought new oil supplies: Prior to 1985/86: (i) Alaska, (ii) North Sea, and (iii) Gulf of

Mexico (brought 5 mb/d in the 8 years prior to the collapse, 9% of world total)

Prior to 2014/15: (i) Biofuels, (ii) Canadian oil sands, and (iii) U.S. shale oil (brought 7 mb/d in the decade prior to the collapse, 8% of world total)

And in both cases OPEC responded

Source: World Bank Note: Last observation is April 2016

0

30

60

90

120

150

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US$/bbl, deflated by U.S. CPI (2014 terms)

In both cases, OPEC disengaged from managing supplies exacerbating the price collapse--delayed response in 1985, quick action in 2014.

Contribution of supply and demand shocks to oil price movements

A VAR model with sign restrictions The reduced-form VAR model is:

yt = a0 + A1yt−1 + A2yt−2 + ⋯+ Alyt−l + ut The variables included in the model are: oil prices, equity prices, and U.S. exchange rates. Supply and demand shocks are identified using sign restrictions. Two orthogonal shocks with impulse responses that satisfy certain signs are estimated using

the model. Adverse demand shock: Oil and equity prices decline reflecting a weak economy. Favorable supply shock: Oil prices decline but equity prices increase. The differing movement of equity prices allows one to discriminate between supply and

demand shocks.

Source: Baffes, Kose, Ohnsorge, Stocker (2015). Note: Based on estimates from a VAR model, identifying the demand and supply shocks using sign restrictions. All shocks except the shock of interest are shut off by setting them to zeros and the model is used to trace out the counterfactual oil price. This exercise is performed separately for supply and demand shocks. The red (yellow) counterfactual shows how much oil prices would have declined since the second half of 2014 only with the estimated supply (demand) shocks. The solid line is the actual cumulative growth rate in oil price since July 2014. The last observation is January 8, 2016.

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-40

-30

-20

-10

0

10

-80

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-60

-50

-40

-30

-20

-10

0

Jul 14

Sep 14

Nov 14

Jan 15

Mar 15

May 15

Jul 15

Sep 15

Nov 15

Jan 16

Supply (right axis) Demand (right axis) Actual (left axis)

Is it demand or supply?

The oil price plunge brought energy prices closer together

0

5

10

15

20

25

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

US$/mmbtu

Source: World Bank Note: Last observation is March 2016

Coal (Australia)

Natural gas (U.S.)

Crude oil (World Bank average)

Natural gas prices follow suit

Source: World Bank Note: Last observation is March 2016

0

5

10

15

20

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

US$/mmbtu

Japan (LNG)

Europe

U.S.

Agricultural Prices

Energy prices

H Fertilizer prices

Policies

Biofuels D

A: Crude oil B/C: Natural gas D/F: Policy-driven Biofuels G1: Profitable biofuels (they may render A, B, and D/F irrelevant; oil price sets a floor to agricultural prices) G2: Innovation in biofuels (agricultural prices fully linked to oil at lower level)

The complex interaction between energy & agricultural prices

Source: Baffes (2013)

0 3 6 9 12 15 18

Turkey

India

Brazil

China

EU-12

Canada

US

SSA

DEVELOPING

HIGH INCOME

WORLD

Manufacture

Agriculture

Cost of energy component, percent

Source: Author’s calculations based on the GTAP database

Energy intensities

0.16 0.18 0.19

0.17

0.04

0.11

0.33

0.00

0.10

0.20

0.30

0.40

Non-energy Grains Oils and meals Other food Raw materials Metals Fertilizers

Source: Baffes (2007) Notes: based on OLS regression of nominal prices on oil price, deflator, time trend, annual data, 1960-2005.

Food commodity prices respond strongly to energy prices Transmission elasticity estimates

Oil’s impact on other commodities

Reduced-form econometric model

log𝑃𝑡𝑖

𝑃𝑡𝑀= 𝛽0𝑖 + 𝛽1𝑖 log 𝑌𝑡 + 𝛽2𝑖 𝑅𝑡 + 𝛽3𝑖 log 𝑋𝑡 + 𝛽4𝑖 log 𝑆𝑡−1𝑖 + 𝛽5𝑖 log 𝑃𝑡𝐸 + 𝜀𝑡𝑖

𝑷𝒕𝒊: Nominal price of commodity i (i = maize, soybeans, wheat, rice, palm oil, cotton) 𝑷𝒕𝑴: Price index of manufacturing goods, 𝒀𝒕: Income (proxied by various measures of GDP), 𝑹𝒕: Interest rate (3-month T-bill), 𝑿𝒕: US$ exchange rate (broad index of currencies), 𝑺𝒕𝒊: Stock-to-use ratio of commodity i, 𝑷𝒕𝑬: Price of crude oil, Data: Annual frequency, 1960-2015 Estimation: OLS and Panel (next slide) as well as ARDL (not shown here)

Maize Soybeans Wheat Rice Palm oil Cotton Panel

S/U ratio (-1) -0.48*** -0.21*** -0.46*** -0.49*** -0.42*** 0.40*** -0.37***

Oil price 0.15*** 0.13** 0.11* 0.15*** 0.30*** 0.10 0.15***

Exchange rate -0.41 -0.21 -0.05 -1.44*** -0.13 -0.16 -0.46**

Interest rate 0.02 -0.06** -0.06** -0.04** -0.06*** -0.05*** -0.01

Income -0.60*** -0.44*** -0.49*** -0.71*** -0.71*** -0.71*** -0.48***

Adjusted-R2 0.67 0.50 0.50 0.70 0.53 0.60 0.59

No of obs 55 50 55 55 50 55 310

Source: Baffes and Haniotis (2016) Notes: Asterisks denote levels of significance.

The role of energy in agricultural prices

0

300

600

900

1,200

1,500

1,800

0

30

60

90

120

150

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15

The U.S. rig count responds to the price collapse US$/bbl Rig count

Source: Baker Hughes, Bloomberg, and World Bank Note: Weekly data, last observation April 22, 2016

Oil price, WTI [left] Rig count [right]

-1,000

-500

0

500

1,000

1,500

2,000

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

U.S. oil production turned out to be resilient, … until recently y-o-y monthly changes, barrels per day

IEA forecast

Source: International Energy Agency Notes: Last actual is January 2016. February 2016 to December 2017 is forecast

The plunge begins

Prices are still higher than the 1985-2004 average

-

40

80

120

160

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: World Bank

Agriculture

Metals

Energy

Index, real (2010 = 100)

Changes (%) in real prices to 2015 from: 1986-2004 1998 Agriculture: +22 +20 Energy: +73 +158 Metals: +31 +54

The ultimate question: 1985-2004 Déjà vu?

-

40

80

120

160

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Source: World Bank Note: The period 2016-25 refers to forecasts, as of April 2016

Agriculture

Metals

Energy

Index, real (2010 = 100)

Crude oil price for 2016

41.00 41.17 39.55

57.95

20

30

40

50

60

70

World Bank forecast Brent futures Consensus Historical average

US$/bbl

Source: World Bank, Consensus Forecast, Bloomberg. Notes: World Bank forecast (made available on April 26), average of Brent, WTI, Dubai. Average Brent futures closing for the week of April 18, including actuals to date. Consensus, median [39.55] and range [33.59-46.09] for Brent as of April 22. Historical average 12-month recovery, median [57.95] and range [55.85-69.11] since the lows of 07/86, 12/98, and 12/08 applied to 01/16 average of $29.78/bbl.

Oil continues its search for equilibrium after November 2015

DEMAND Forecast growth of emerging economies, notably China’s, are revised downwards. The Northern Hemisphere experienced milder-than-usual winter linked to El Niño by some).

SUPPLY OECD stocks reached record high levels. OPEC production surged, led by Iraq and Saudi Arabia. The US shale oil industry turned out to be more resilient-than-expected, but the first monthly year-on-year

decline took place in December 2015. MACRO

US$ (against major currencies) appreciated further, but weakened recently (down almost 7 percent since mid-January).

POLICY OPEC reaffirmed retaining market share in its December 2015 meeting. OPEC & non-OPEC producers failed to agree on freezing production during their April 17 meeting in Doha.

Politics appears to have played a key role. Sanctions on Iran were removed earlier-than-expected (it already increased exports). US lifted the effective ban on crude oil exports (no material changes, US is still a net oil importer).

OECD stocks and OPEC crude production surged OECD crude and product stocks OPEC crude oil production

Source: International Energy Agency

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

Million barrels

28

29

30

31

32

33

Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

Mb/d

Iran’s history

0

1

2

3

4

5

6

7

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Consumption Net exports

Iranian Revolution, 1979 Iran-Iraq War, 1980-88 Escalation of sanctions, 2011-15

mb/d World share: 10.1% World share: 4.1%

Source: BP Statistical Review. Note: Production includes crude oil and liquids.

Proved oil reserves Proved natural gas reserves

0 50 100 150 200 250 300

Brazil

China

Qatar

Kazakhstan

Nigeria

Libya

United States

United Arab Emirates

Kuwait

Russian Federation

Iraq

Iran, Islamic Rep.

Canada

Saudi Arabia

Venezuela

9.3% of world total

billion barrels

0 10 20 30 40

Canada

Indonesia

China

Iraq

Australia

Algeria

Nigeria

Venezuela

United Arab Emirates

Saudi Arabia

United States

Turkmenistan

Qatar

Russian Federation

Iran, Islamic Rep.

18.2% of world total

trillion cubic metres

Iran’s potential

Source: BP Statistical Review and World Bank

Global metal consumption

Source: World Bank and World Bureau of Metal Statistics

-

1

2

3

4

5

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Million metric tons

World, excluding China

China

50

80

110

140

170

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Agriculture price index ENSO Index peaks

Index, deflated by U.S. CPI, Jan. 2010=100

-12.6% -19.6%

1.4% -2.9%

-0.9% -2.2%

-6.5% -7.3%

10.4% 9.8%

3.8% -3.5%

-7.1% -14.8%

Agricultural prices decline despite El Niño

Source: World Bank and National Oceanic Atmospheric Administration. Note: The numbers denote percent changes of the six-month average price index leading to the episode compared to the previous six-month period (bold) and the corresponding six-month period of the previous year (italic). The last observation is February 2016.

The strongest El Niño on record, 1997/98