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Broad declines among commodity groups, led by a sizable retreat in Oil & Gas, put an end to nine months of consecutive increases in the BMO Financial Group Commodity Price Index in June. 

After reaching an all-time peak in May, the Index fell 3.6% to 158.7 (1993=100) last month, though this still represented the second highest level on record, according to a report released today by BMO Economics. 

“Commodity markets have benefited from a powerful rally that began in mid-2002, during which the all-commodity index surged by almost 65%, before giving some of this back in June,” said Robert Hogue, Senior Economist, BMO Financial Group. “The rally has reflected strengthening economic prospects in North America and abroad, booming residential construction, and declining commodity inventories.”

“Going forward, however, commodity markets are expected to cool off further from their recent boiling point,” said Mr. Hogue. 

In June, with both fuels in retreat, the Oil & Gas Index group showed the biggest drop (down 7%), after rising sharply during the previous three months.  Crude oil fell 5.3% to an average of US$38.16/barrel.  This decline reflected strong global production, with particularly large gains in OPEC and Russia, as well as OPEC’s decision, strongly influenced by the Saudi position, to raise quotas further, starting in August.  Nonetheless, current prices continue to embed a large risk premium based on persistent concern about gasoline supplies, labour disruptions and civil strife in Nigeria, a shaky political situation in Venezuela, and most importantly, the potential that terrorist activity will disrupt the flow of oil from the Middle East. 

Natural Gas prices also declined in June, following down those of competing fuels.  Additionally, temperate weather during the second half of June reduced the natural gas demand for air conditioning and power, leading to a stronger-than-anticipated build-up in natural gas inventories.  In Canada, inventories have moved above their five-year average.  In Alberta, the price at Empress showed a drop of 8.5% in June to US$5.38/mmbtu. 

“Despite seemingly adequate inventories, prices have to remain high to price out some consumption so that inventories can rebuild to adequate levels by the winter”, added Mr. Hogue.

Only the Metals & Minerals commodity group posted a gain in June (up 4%), retracing part of the previous three months’ declines.  Nickel led the way with a jump of almost 22% to US$6.18/lb.; aluminum was up 3.4% to US$76.3/lb. and gold rose 2% to US$392/oz.  The recovery in minerals was aided by strong Chinese demand and a weaker tone to the U.S. dollar.  “Improving global economic conditions, against a backdrop of continuing inventory declines, are expected to keep prices well supported through the remainder of the year”, said Mr. Hogue.

Meanwhile, lower wood product prices caused the first decline in the Forest Products Index in six months, which fell by 2.6%.  “The biggest negative force in this commodity group in June was a sharp correction in structural panel prices, as they continued to come down from record levels earlier this year,” noted Mr. Hogue.

Lumber prices also fell, though by a comparatively smaller extent.  “Lumber markets finally let out some steam, as higher production, rising offshore imports, and easing railway transportation bottlenecks caused prices to drop for the first time in eight months,” said Mr. Hogue.

Pulp and paper prices generally moved up in June, although newsprint constituted an exception, staying flat.

The Agriculture Index slipped for the third consecutive month in June (down 2.7%).  Oilseeds lost ground amid an improved crop outlook, lingering concerns about the strength of Chinese demand, and a firmer tone to the Canadian dollar.

Grains sagged under the pressure of the harvest in the Northern Hemisphere.  “A significant recovery of wheat crops in several countries – especially in Europe – has increased competition and softened prices,” said Mr. Hogue.

However, the Agriculture Index remained notably higher than a year ago, as markets continue to receive support from solid demand and low stock levels. 

BMO Commodity Index for June 2004

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

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