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Energy prices pushed the BMO Commodity Index to record levels in May, with the Oil and Gas and Forest Product gains more than offsetting declines in the price of Metal and Minerals and Agriculture, noted a BMO economic report issued today.  The BMO Index finished the month up 4.9 per cent at 164.5 (1993=100).

“Although oil and gas have been major drivers in moving the price index, the broader rise can be attributed primarily to strengthening economic prospects in North America and abroad, booming construction and declining commodity inventories,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “However, we anticipate that this rate of increase will trail off as energy and wood prices wind down in the near future.”

In May, the Oil and Gas Index soared to the second highest level ever, rising 13.5 per cent to 269.4 (1993=100).  The sharp increase in oil prices reflects tight inventories of crude and gasoline.  Oil prices rose 9.2 per cent to an average of $40.29/barrel, while Alberta Empress Gas prices climbed 17.4 per cent to an average of US$5.88/mmbtu. 

“The energy markets responded negatively to the continued disruption of Iraq’s export infrastructure and terrorist attacks against oil workers in Saudi Arabia,” said Sweet.  “Although unrest in the middle-east may continue to disrupt production and exports, the overall volume of global oil production should increase substantially, particularly in Russia, Africa and OPEC, which should help to moderate prices going forward.” 

Natural gas prices were boosted by soaring oil prices and market perceptions of a growing gap between potential demand and available supply.   “Although the link between crude oil and natural gas has weakened due to technology changes in power generation and increasingly stringent environmental regulations, the two fuels are still substitutes at some electrical utilities, in industrial process heating, and as feedstocks to petrochemical production,” said Sweet.  “Thus, the sharp rise in oil prices has provided a lift to natural gas.”

The Minerals and Metals Index suffered a significant broad-based decline in May, falling 5.5 per cent during the month to 132.5 (1993=100).  

“In part, steep declines in April and May reflected a correction from very sharp increases earlier in the year and in 2003, which were partially fuelled by the falling U.S. dollar at that time,” said Sweet.

Nickel suffered a 12 per cent drop in May, Copper prices declined by 6.2 per cent and Aluminum prices eased by 6 per cent.

The Forest Products Price Index continued to climb in May, rising 1.9 per cent to reach 129.4 (1993=100), its highest level since 1996.  Most of the sub-index’s components contributed to the advance, with lumber leading the way.  The main exception was structural panels, where prices have begun a downward correction from record levels. 

“Lumber markets remained extremely hot in May with robust American residential housing construction continuing to drive demand,” said Sweet.  “Additionally, relatively tight lumber inventories and railway transportation problems kept many lumber consumers scrambling to fulfill their requirements.  However, we believe that further gains in lumber prices, if any, will be moderate as rising interest rates cool house building activity across North America later in the year.”

Market pulp, which has shown strong price strength to date, now faces a drop off as easing demand by China reduces inventory pressure.  The average price for newsprint climbed during the month and should rise higher as newspaper coverage of this summer’s Olympics and the U.S. presidential election pushes readership demand higher.

Agricultural prices slipped again in May, falling 1.3 per cent to 106.5 (1993=100).    Soybeans and canola continued to lose ground on concerns of shrinking Chinese demand and of the ability of importers in China to obtain financing. Canola fell 4.9 per cent in May, although it remained roughly 10 per cent higher than a year ago. Nonetheless, the overall agricultural sub-index stood roughly 11 per cent higher than a year ago. 

Wheat recorded a moderate advance of 0.9 per cent in May, constrained by harvest pressure in the Northern Hemisphere as well as weakness in oilseed markets. “However, given falling overall global stocks, prices are likely to be supported at high levels over the course of the year,” said Sweet.

BMO Commodity Index for May 2004

The full BMO Financial Group Commodity Price Index report for May 2004 is available at www.bmo.com/economic.

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