Petrol and food prices will fall thanks to oil glut, says World Bank

Petrol and food prices will fall over the next two years thanks to a glut in oil production, the World Bank has said, offering hope to consumers that the cost pressures of the past three years could start to ease.

Its analysis found that this year’s downward trend in the oil price resulting from increased production, falling demand in China and the transition to clean energy is set to continue even if the conflict in the Middle East worsens.

It predicts the global supply of oil will exceed demand by an average of 1.2m barrels per day (bpd), pushing down prices from an average of $80 a barrel for Brent crude this year to $73 a barrel in 2025 and $72 in 2026.

The World Bank said the knock-on effect of the tumbling value of oil would be to push down the average price of global commodities, including food and metals, to a five-year low.

From 2024 to 2026, global commodity prices are projected to tumble by nearly 10%. Global food prices are set to fall 9% this year and a further 4% in 2025 before levelling off, the Washington-based development organisation said in its latest commodity markets outlook.

Even so, overall commodity prices will remain 30% higher than they were in the five years before the Covid crisis hit in 2020, the report added.

The report will provide comfort to central banks concerned about the effect of rising prices on average inflation, allowing them to reduce interest rates at a faster pace than previously expected.

Governments seeking to raise more tax revenues from petrol and diesel sales, including the UK government, will also be reassured.

The UK chancellor, Rachel Reeves, is under pressure to close a gap in the government’s finances by raising fuel duty. The previous Conservative administration introduced a temporary cut in the duty of 5p a litre in 2022, which the chancellor must reverse just to match the forecasts of the Treasury’s economic forecaster, the Office for Budget Responsibility.

Despite facing opposition from road user groups, Reeves is expected to raise fuel duty by more than 5p a litre to boost revenues beyond what is already forecast by the OBR.

The oversupply of oil by more than 1.2m bpd identified in the World Bank report has only happened twice before – at the beginning of the pandemic, when many economies were shut down, and the 1998 Asian crisis, when much of the far east suffered an economic slump.

Fears that an escalation of the fighting in the Middle East region could send oil prices soaring had heightened in recent weeks since Israel escalated its attacks on Hezbollah in Lebanon.

While more intense battles on the scale of the Iraq war in 2003 would send prices higher than predicted by the World Bank in its central forecast, the increase would be limited to an average $84 a barrel in 2025, just 5% above the average in 2024.

The World Bank said it expected the oversupply in 2025 to partly reflect a big shift in China, the world’s biggest manufacturer, “where oil demand has 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)”.

The oil cartel Opec, which includes Saudi Arabia, Kuwait and Venezuela, has maintained supplies despite the downturn, but cuts to production were unlikely to have the effect of increasing prices.

Other oil producing nations – some of them connected to Opec as affiliates in the Opec+ grouping – were likely to ramp up exports to boost their own revenues.

Opec+, which includes Russia, maintains significant spare capacity amounting to 7m bpd, “almost double the amount on the eve of the pandemic in 2019”, the report said.

“The good news is that the global economy appears to be in much better shape than before to cope with a significant oil shock,” said Ayhan Kose, the World Bank Group’s deputy chief economist.

“That opens up some rare opportunities for policymakers in developing economies: first, declining commodity prices can provide a helpful complement to monetary policy to bring inflation back to targets; second, policymakers have a window to wind back costly fossil-fuel subsidies.”