In its Commodity Market Outlook report issued yesterday, the Washington-based lender said supply disruptions in Iraq and Nigeria hiked oil prices in the first quarter.

Reuters reported yesterday front-month Brent crude futures traded at US$44.75/bbl at 0815 GMT, up 27 cents from their last settlement. US crude futures were also up 27 cents, at US$42.91/bbl.

“After dropping to US$25/bbl in mid-January, oil prices rebounded to more than US$40/bbl in mid-April on improved sentiment and investor short covering,” the World Bank said, noting that prices were still 22 per cent lower than the previous quarter and down 70 per cent from June 2014.

“In addition, the United States reported that oil production in December fell year-on-year for the first time in several years, and the US Energy Information Administration projections show falling output accelerating in 2016,” the World Bank said.

The bank said a weaker US dollar and improving oil demand also contributed to the rally. That said, the oil market remains oversupplied with stocks near record levels.

Crude oil demand usually slows in late winter and spring due to refinery maintenance, so the bank expects current stocks to remain high, until demand picks up in the second quarter of 2016.

The World Bank expects oil supply to decline further later this year, mostly due to lower output by onshore US producers.

“Slowing output growth from higher-cost, short-cycle, unconventional oil in the US is expected to help rebalance supply. This output includes, but is not limited to, shale plays,” the bank said.

But the bank said it’s still uncertain as to how far production will decline or when it may start rising again.

“The recent oil price rally brought some relief to producers’ cash flow, and many hedged production forward at higher prices, thereby delaying supply rebalancing. Higher prices and continued efficiency improvements could further impinge on required rebalancing,” the bank said.

On the other hand, the industry borrowed heavily during the boom years and spent their cash flow. Many of these companies are encumbered with debt, selling assets, and entering into bankruptcy.

“With external financing increasingly closed, companies will need greater cash flow generation to fund drilling and completion of wells which will depend on the level of prices,” the bank said.

The World Bank said near-term upside risks to the price forecast include dwindling non-OPEC supply and Iran’s slow export growth. There are also risks of supply disruptions among key OPEC producers due to internal conflict and financial constraints.

Higher global demand, particularly from the transport sector, will also help reduce the large global stockpile.

Downside price risks include a slower rebalancing because of weak demand, and continued resilience of US producers to sustain output and develop uncompleted wells. A large increase in Iranian exports and higher production from the rest of OPEC members will sustain the surplus of global stockpiles, and thus continue to put downward pressure on prices.

Meanwhile, the World Bank expects natural gas prices to fall in 2016 on continued weak demand and surplus supply. Gas prices in the US are expected to fall by four per cent and average US$2.5/mmbtu due to high stocks.

However, strong growth in the power sector, rising exports, and slowing production growth are expected to underpin prices. Risks to the forecast are mainly to the downside, given a global supply surplus and forthcoming increases in new LNG capacity.