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A surge in oil and gas prices moved the BMO Financial Group Commodity Price Index up by 1.7 per cent in July, boosting it close to its all-time high posted in March of this year.  The index reached 181.7 (1993=100), almost fully retracing declines in April and May. 

The rise in the index was entirely driven by oil and gas, as every other sector measured by the bank’s index lost ground.

“The powerful rally in commodity markets since mid-2002 has been driven by strong demand from China, other parts of Asia and the United States, and by generally declining commodity inventories,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “While the strong uptrend in commodity prices is not expected to be sustained during the remainder of 2005, the all-items index is likely to hold near its recent, elevated levels.  By 2006, moderating global economic growth and rising production of several commodities should relieve tightness in most commodity markets and generally drive prices lower.”

In July, the Oil & Gas Index rose 5.2 per cent to a level 31.5 per cent above that of a year earlier.  “This index has continued to rise at a fast pace,” said Sweet.  “Both crude oil and natural gas recorded sizable gains, driven by concerns that tropical storms would disrupt production in the Gulf of Mexico and by generally tight markets.”

Energy prices continued their sharp upswing into August.  Oil prices jumped to the mid-US$60 range as the issue of security of Middle East supplies came to the fore and refinery problems raised questions about product supply adequacy.  Natural gas prices have also risen sharply, spurred by strong demand for gas-fired electric power generation.

“West Texas Intermediate Crude Oil is predicted to average US$61/barrel during the second half of 2005, compared to US$51 in the first half,” noted Sweet.  “An improved supply-demand balance in 2006 should see WTI ease moderately to an average of US$52 for the year.”

Among the other sectors, the Metals & Minerals Index slipped 0.7 per cent in July, largely because of weaker prices for precious metals, nickel and zinc.  Despite the decline in July, the index remained 9.3 per cent higher than a year ago. 
 

“Metals prices are generally expected to decline during the next year,” said Sweet.  “Low inventories should keep metal prices at relatively high levels through the remainder of 2005.  By 2006, rising supplies for some metals should lead to an easing in prices.”

The Forest Products Index fell for the fifth straight month, with plentiful supplies continuing to be the overriding factor sustaining markets’ negative tone.  Further affecting markets in early August was the failure of the long-awaited NAFTA decision to bring the lumber trade dispute any closer to a resolution, despite a final ruling in Canada’s favour.

“The Forest Products Index is expected to continue to trend moderately lower through the remainder of 2005 and 2006, mainly due to a cyclical erosion of market conditions for wood products,” stated Sweet.  “Market pulp prices will also likely decline in 2006, as huge capacity increases in South America and Asia overwhelm any improvement in demand.”

The Agricultural Index fell 4 per cent in July, with harvest pressure, improved crop prospects, and increased competition contributing to the decline.   Losses were concentrated largely in wheat.    “Despite the decline during the month, average prices remained close to 5 per cent higher than a year ago,” said Sweet.  “With global production generally outstripping consumption for the 2004-05 crop year, stocks have risen substantially relative to use, which should pressure prices lower over the next year.”

BMO Commodity Index for July 2005

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

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