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The powerful rally in commodity markets since mid-2002 is expected to lose steam in 2005, according to the new Commodity Price Report released by the BMO Financial Group Economics Department.

“We expect to see a moderation of the growth in demand for many commodities, producers cranking up production and an easing in geopolitical tension in some parts of the world,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.

The rally had carried the BMO Financial Group Commodity Price Index to its all-time high in 2004.  “Strong demand from China and the United States, the build up of a sizable risk premium in oil prices and generally declining commodity inventories were prominent driving forces,” stated Sweet.  “But 2005 should see a retreat in the Index, through lower anticipated prices for oil, wood products and agricultural products.”

Sweet made his comments upon the release of the bank’s December Commodity Price Index, which rose 0.8 per cent from the previous month to 164.6 (1993=100).  Over the 12 months through December, the All-Items Index increased 16.6 per cent, sustaining the trend that saw commodity prices rise 44 per cent in the preceding 24-month period.

The Oil & Gas Index has retreated from its peak late in 2004 and is projected to decline moderately further in 2005.  “The easing will likely come entirely from lower oil prices, as natural gas prices are forecast to remain virtually flat on an annual average basis,” said Sweet.  “Softer oil prices would primarily reflect strong global production and the unwinding of market concerns about tight inventories.  However, with OPEC intending to rein in output to keep prices well above the cartel’s previous target range, the average price for U.S. benchmark West Texas Intermediate is projected to decline only moderately to U.S.$38/barrel from an average of U.S.$41.50 in 2004.”

The Metals & Minerals Index is expected to cede some ground through the coming year, as global economic conditions temper.  However, solid demand, limited supply growth and a soft U.S. currency should keep prices at elevated levels. 

The Forest Products Index, overall, is expected to sustain most of its recent gains through 2005 – though this would mask divergent trends for wood products and pulp and paper.  “Market conditions for wood products are anticipated to soften, while those of pulp and paper should remain buoyant,” stated Sweet.  Meanwhile, large crops in key regions are expected to push the Agricultural Index lower through the year.  However, wheat prices should face only a moderate decline as global inventories remain low relative to underlying consumption.

BMO Commodity Index for December 2004

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

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