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Though retreating slightly in November, the BMO Financial Group Commodity Price Index came in at its third-highest level on record.  After its all-time high in October, the index fell 2.8 per cent last month to 164.1 (1993=100).

“Commodity markets have benefited from a powerful rally which started in mid-2002,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “It has been sustained by strengthening economic prospects in North America and abroad, booming residential construction, and generally declining commodity inventories.  During that run, the all-item index rose by a robust 64 per cent.

“Going forward, most commodity markets are expected to cool down from their recent boiling point, although lean inventories for base metals and crude oil should keep prices at relatively high levels.”

The Oil & Gas Index fell 6.5 per cent in November, although its strong uptrend in 2004 has left it close to 44 per cent higher than a year earlier.  Most of the decline reflected a downward drift in oil prices as inventories of crude in the United States accumulated to more comfortable levels, supported by strengthening imports.  Although inventories of heating oils remain low for this time of year, the relatively warm start to the heating season has calmed some concerns about winter availability.  Natural gas prices also softened, in line with those of competing oil-based products and in the face of relatively high storage levels. 

“The fact that natural gas prices have not retreated more quickly in the face of high inventories and a relatively warm start to the heating season reflects the market’s concern that North American production will not be able to match the growth in potential demand for the fuel,” remarked Sweet.

The Metals & Minerals Index extended recent gains, as markets continued to focus on the strength of demand, low inventories and continuing weakness of the U.S. dollar.  “Metal and mineral prices have risen on average by 20 per cent over the past year, with copper leading the pack,” said Sweet.  “Global economic conditions are expected to remain positive, so limited supply growth and a soft U.S. currency should keep prices well supported over the next several months.”   

The Forest Products Index declined only modestly, reflecting offsetting trends between the prices of wood products and pulp and paper.  Lumber and most other wood products corrected further from earlier lofty levels, while pulp and paper either paused or, in the case of newsprint, increased slightly.

“Looking ahead, an anticipated slowdown in housing construction is expected to maintain a moderating tone for wood product markets, while sustained economic growth and supply discipline should boost prospects for pulp and paper prices over the coming year,” stated Sweet.

The Agricultural Index advanced again in November, with the increase entirely a reflection of higher wheat prices.  The gain left the index 4.7 per cent higher than a year ago.   “While prices are likely to remain firm in the coming months, a healthier global production outlook suggests prices will weaken next year,” said Sweet.

BMO Commodity Index for November 2004

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

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