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Commodity markets let out a bit of steam in November, as the BMO Financial Group Commodity Price Index fell for the first time since the spring and for only the third time in 2005.  The index declined 8.2 per cent from the previous month, but remains a significant 21.1 per cent higher compared to one year ago.

“The 8.2 per cent decline originated entirely in the Oil & Gas group, which reversed a portion of its substantial gains in the past year,” according to Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “All other commodity groups registered either marginal or moderate advances in the month.”

Sweet says the sharp uptrend in the composite commodity price index in 2005 is not expected to be sustained through 2006.  “Higher prices are expected to slow demand growth and encourage increases in production of several commodities, relieving market tightness.  However, performance amongst commodities is likely to be mixed.”

Among the sectors measured, the Oil & Gas Index showed the greatest decline in November, falling 16.2 per cent.  The prices of both crude oil and natural gas fell as production in the Gulf Coast region continued to recover following the devastating hurricanes in September. Refinery output is almost back to normal and inventories of crude oil, refined oil products and natural gas are viewed as adequate.  “Inventories have been bolstered by very strong imports of crude oil and refined products, and by some conservation measures,” stated Sweet.

He further noted that during the first three weeks of December, the price of crude oil, while volatile, has held at or below its November average.  That of natural gas, however, rebounded upwards as colder-than-usual weather substantially increased the draw on inventories.

The Metals & Minerals Index continued its rise in November with a broad-based gain of 4.1 per cent for the month.  Gold received support from strong demand in India and China, declining production, and the potential for a drop in the value of the US dollar given the large US current account deficit.  Base metals also advanced with the exception of nickel. 

“The November gain lifted the index about 14 per cent above its year-ago level,” said Sweet.  “Prices are generally expected to retreat over the next year although solid demand and limited production growth should keep them at elevated levels.”

The Forest Products Index was little changed, as movement in most components tended to be modest and in offsetting directions.  The biggest news to hit the sector came in early December when the U. S. Department of Commerce announced that, effective later in the month, it will cut duties collected on lumber imports from Canada by close to half.  “Looking forward to 2006, a projected slowing in housing construction in North America is expected to keep wood product prices on a downward course,” stated Sweet.  “Pulp and paper prices are likely to hold up relatively better.”

The Agricultural Index rose slightly in November with higher prices for wheat, corn and soybean partially offset by a decline in canola.  Prices have slipped over the past 12 months amid improving market balances.  “While further declines are likely, a reduction in stocks relative to use should keep prices well supported over the next year,” noted Sweet.

BMO Commodity Index for November 2005

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

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