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'War Premium' Boosts Oil Prices; Helps Bolster January Commodity Index, Says BMO Financial Group Economic Report War with Iraq could spike oil prices to more than US$50 a barrel, says economist  


Energy prices rose 13 per cent in January and lifted the overall BMO Financial Group Commodity Price Index to 124.9 (1993=100), an increase of 5.9 per cent for the month.  The growth rate represented the strongest monthly gain since last March.

“There is no question that the driving forces behind the oil price increase have been the war premium caused by ongoing uncertainty in the Middle East and the strike-induced sharp reduction in output in Venezuela,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “The same gloomy international political forces also sent world investors into traditionally safe havens such as gold, which in turn lifted the Metals and Mineral Index for a second consecutive month.”

The Oil and Gas Index for January rose to 213.1 (1993=100) which is 13 per cent higher than December and 92.5 per cent higher than a year ago.   Oil prices rose steadily through January and early February, reaching US$36.60/barrel on Valentine’s Day.  “We believe that the war premium on oil prices amounts to as much as US$4 a barrel and prices could spike above US$50 a barrel if there is a war against Iraq,” said Sweet.

“While the short term price for oil will likely rise, we believe that if prices become entrenched at elevated levels, governments will release their strategic petroleum reserves in order to ease price pressures,” said Sweet.  “War issues aside, given recent significant increases in OPEC output and the usual sharp decline in demand during the spring, we expect oil prices to ease from their first quarter highs and to average US$25.75/barrel in 2003, and US$22.75/barrel in 2004.”

Natural gas prices have also risen due to weak output levels, a colder-than-normal winter, and a rapid draw-down in underground storage.  The BMO report noted that despite very high prices for this commodity through 2002 and early 2003, there has not been much positive response from suppliers.  For example, the number of U.S. gas drilling rigs is currently 11 per cent below the average of the past two years.  BMO economists expect the price of Alberta Empress to average US$3.70/mmbtu in 2003, which is about 41 per cent higher than last year’s price average.  However, Sweet warned that “the main risk to this forecast for gas prices is that they could be considerably higher.”

The BMO Forest Products Index started the year on a promising note for producers as prices in the sector extended their modest advance of December and rose another one per cent.   On the lumber side of the index, seasonal factors and the pullback of European suppliers from the North American market helped remove some of the excess supply that has weakened prices for the past few years.

“The forestry sector, as a whole, will continue to suffer in the short term because of continued excess capacity and uncertain economic indicators,” said Sweet.  “Nonetheless, we expect that with the North American economy set to grow more quickly in the latter part of the year, rising demand for forest products will provide a more solid footing for higher price levels.”

The Agricultural Index fell 3.4 per cent in January to 98.2 (1993=100).  Wheat prices fell for the fourth month in a row, down 3.6 per cent, but the price at US$4.33/bu is still a robust 22 per cent higher than a year ago.   Canola prices fell 4.4 per cent in January, weighed down by lackluster demand and expectations of large soybean crops in the United States and Argentina.  The monthly price average for Canola still remains close to 20 per cent higher than a year ago.

BMO Financial Group Commodity Price Index for January 2003

- Jan. 2003 Level
(1993 = 100)
Per cent change
from month ago
Per cent change
from year ago
All Commodities 


5.9  28.5 
Oil & Gas  213.1  13.0  92.5 
Metals & Minerals  108.0  2.5  8.3 
Forest Products  86.8  1.0  -5.1 
Agriculture  98.2  -3.4  21.4 

The full BMO Financial Group January 2003 Commodity Price Index and Report is available on the bank’s website at