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A surge in energy prices propelled BMO’s all-items commodity index up into record territory after it had lost momentum following its previous record high this past May. Price increases for various metals and agricultural products also contributed to the advance but were comparatively more subdued.  Most forest product prices bucked the general trend and fell during October. 

“BMO’s commodity price index has risen by 69 per cent from its low point in July 2002,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “Commodity markets have benefited from a powerful rally during this period, which has been sustained by strengthening economic prospects in North America and abroad, booming residential construction, and generally declining commodity inventories,” he stated.  “In turn, climbing commodity prices have bolstered Canada’s current account surplus and contributed to the sharp rise in the Canadian dollar.”

“Going forward, most commodity markets are expected to cool down from their recent boiling point, although there remain some upside risks to energy prices.”

The Oil & Gas Index posted its biggest increase in more than 30 months, fuelled by steep price increases for both commodities.  The price of West Texas Intermediate crude oil surpassed US$55/barrel at one point in the month – a reflection of concerns about narrow margins of unused global capacity.  Natural gas prices rose in tandem with oil prices, despite the fact that underground storage reached a record-high level by the end of the month.

However, despite continued below-normal production in the Gulf of Mexico, inventories of crude oil in the United States showed stronger-than-expected gains during the second half of the month.  “This helped soothe supply fears and contributed to a retreat in oil prices from their recent peak,” stated Sweet.  

The Forest Products Index fell by 9.7 per cent in October, the steepest monthly drop in more than 11 years and the second monthly decline in a row.  After spending much time at lofty levels earlier this year, wood product prices have come down significantly in the last two months, as market tightness eased. 

On the pulp and paper side, prices increased again for several writing paper grades – including newsprint – although they declined for market pulp in the face of high inventories.  “Looking ahead, an anticipated slowdown in housing construction is expected to maintain a softer tone in wood product markets, while pulp and paper prices face better upside prospects over the coming year,” said Sweet.

The Metals & Minerals index continued to advance with a 4.5 per cent gain for the month.  “This gain was broad-based, as metal markets were driven by strong demand in the United States and China, historically low inventories, and the continuing weakness of the U.S. dollar,” stated Sweet.  “Over the past year, metal and mineral prices have risen by approximately 24 per cent.  With global economic conditions expected to remain healthy, tight supplies and a soft U.S. currency should keep prices well supported over the next several months.”

After rising in September after five consecutive months of decline, the Agriculture Index rose a further 1.4 per cent in October.  The increase, owing solely to a 4.8 per cent gain in wheat prices, left the index roughly 5 per cent higher than one year ago.  While the sub-index is likely to remain near current levels over the next several months as low global stock levels support prices, prospects of larger crops in key world regions have raised the likelihood of falling prices in 2005.

BMO Commodity Index for October 2004

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