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The BMO Financial GroupCommodity Price Index extended its gains in August, rising 1.5 per cent to 164.1 (1993=100), just short of its all-time high set last May.

Forest products were largely responsible for the increase during the month though crude oil and natural gas also contributed.  Meanwhile, agriculture and metal & mineral prices slipped.

“The rally in the BMO Commodity Price Index reflects strengthening economic prospects in North America and abroad, a robust residential construction sector and generally declining commodity inventories,” said Kenrick Jordan, Senior Economist, BMO Financial Group.  “Looking forward, we expect that commodity prices will temper though there remain considerable upside risks to energy prices.”

A 10 per cent increase in crude oil prices to just over US$45/barrel lifted the Oil and Gas Index 1.6 per cent in August and 28 per cent from a year ago.

“High oil prices in August did not reflect inadequate supplies.  Rather, they reflected a substantial risk premium associated with ongoing geopolitical considerations in key producing countries,” said Jordan. “When oil prices flirted with the US$50/barrel level during the month, the risk premium ran close to US$20 a barrel.”

Natural gas prices fell during the month as cooler weather reduced the demand for air conditioning, causing the price of Alberta Empress to fall 6.5 per cent to US$5.05 per million British thermal units.

“Canadian producers are struggling to maintain natural gas output and, in the United States, natural gas reserves in easily accessible fields are rapidly being depleted.  These factors should keep North American gas prices high over the next few years,” said Jordan.

Following a 3 per cent surge during the previous month, the BMO Metals & Minerals Index slipped 1.4 per cent in August to 140.0 (1993=100) amid concerns about the strength of global demand in the face of surging oil prices, halting U.S. economic growth and falling consumer confidence.

“Despite the August retreat, prices for metals & minerals are still a robust 23 per cent higher than a year ago and are expected to be well supported for the rest of this year,” said Jordan.

Among the metals tracked in the report, nickel prices suffered the largest decline in August, down close to 9 per cent for an average of US$6.21/lb.  Aluminum prices also fell, down 0.8 per cent to US$76.9 cents/lb.  In contrast, copper defied the bearish pall over base metals as prices increased one per cent to US$1.29/lb., helped by the threat of a strike in Peru. 

Forest Products were the big movers in August as this sub-index climbed 3.8 per cent to 130.9 (1993=100), its highest level since January 1996.   The upward thrust came almost entirely from lumber products with the Western SPF 2x4 benchmark rising US$33/mbf to US$454/mbf, its highest level since November 1996.  Pulp and paper prices – including those for market pulp and newsprint – were generally unchanged during the month.

“Wood prices continue to reflect robust demand from home builders in North America,” said Jordan.  “Looking ahead, we believe that current levels of wood product prices are not going to hold, declining in concert with an anticipated slowdown in housing construction over the next year.”

The BMO Agricultural Price Index suffered a fifth straight monthly decline in August, down roughly 5 per cent to 92.6 (1993=100).

“Losses were driven by prospects of larger crops in key regions, concerns regarding the strength of Chinese oilseed demand, and heightened competition from producers in the Former Soviet Union,” said Jordan.  “Recent declines have completely wiped out the past year’s gains, with average prices in August one per cent lower than a year ago.”

Wheat was down 6.2 per cent while canola was off 2.6 per cent in the month.

BMO Commodity Index for August 2004

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

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