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The BMO Financial Group Commodity Price Index advanced 1.4 per cent to 166.9 (1993 = 100) in January, just shy of the all-time high reached in October. The thrustwas almost equally generated by rises in the Oil & Gas and Forest Products sub-indexes, and by slightly smaller gains in Agricultural prices.

“The powerful rally in commodity markets since mid-2002 has been driven by strong demand from China and the United States, the buildup of a sizable risk premium in oil prices and generally declining commodity inventories,” according to Earl Sweet, Assistant Chief Economist, BMO Financial Group. 

“However, the rally is expected to lose steam in 2005, as growth in demand for many commodities moderates and commodity producers crank up production.”

The Oil & Gas Index rose a moderate 2 per centin January, after having declined a cumulative 18 per cent during the previous two months.  A rise in oil prices more than offset a decline in natural gas. 

“Although inventories of crude oil and products continued to recover, prices strengthened on increased insurgency in Iraq prior to the elections in that country and on indications that OPEC has significantly shifted upwards its price targets,” said Sweet.  A moderate softening in natural gas prices reflected healthy underground storage and the passing of the halfway mark of the heating season. 

The Metals & Minerals Index was the only sub-index that slipped in January, falling 0.8 per cent.  “This partially reflects the impact of the rise in the US dollar, which made metals more expensive in other currencies,” said Sweet.  While expected to moderate, global economic growth is slated to remain solid this year, keeping the demand for metals strong and prices relatively high.

Higher wood product prices lifted the Forest Product Index for the second consecutive month with a 1.9 per cent rise.  Lumber and panel markets benefited from continued solid demand from home-builders and tight supplies, while pulp and paper prices generally remained stable.  Market conditions for wood products are anticipated to soften later this year, while those of pulp and paper should remain firm.

The Agricultural Index edged upward by 1.1 per cent in January, with the gain due solely to rising wheat prices.  “With large crops in key producing areas overhanging global markets, we expect to see pressure for lower prices over the course of the year,” according to Sweet.

BMO Commodity Index for January 2005

The full BMO Financial Group Commodity Price Index report for January 2005 is available at www.bmo.com/economic.

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