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Surging metal prices and strong gains in agricultural commodities propelled the BMO Financial Group Commodity Price Index higher in May to 208.7 (1993=100), an increase of 1.3 per cent over the previous month.  This was the second monthly increase in a row, and continued a recovery from a drop in the first three months of the year caused by a fall in natural gas prices.

“The strength in metals and agriculture more than compensated for turbulence in energy markets and a softening in forest products,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  

Sweet did note that despite the monthly rise in the Index, sentiment turned against key commodities in the latter half of the month and early June.  In particular, prices of several metals plunged, highlighting markets' vulnerability to jitters at such high price levels.  “Nonetheless, commodity markets are expected to remain generally buoyant in 2006, though with heightened market volatility,” said Sweet.

Among the sectoral indices, the Oil & Gas Index fell 3.4 per cent in May. “Despite large inventories, oil prices continued to rise as escalating tensions related to Iran's nuclear programme reinforced the market's focus on supply risk,” stated Sweet.  “However, bearish conditions in the natural gas market – where prices fell to levels less than half their December peak – more than offset the increase in oil.”

Sweet also said that with fundamentals playing a more dominant role in the natural gas market, the very high inventories resulting from the unusually warm winter have placed significant downward pressure on spot prices.  “However, Winter 2007 futures prices remain at more than US$10/barrel, reflecting concerns that a warmer-than-usual summer with more demand for air conditioning, along with an active hurricane season potentially disrupting production of gas in the Gulf of Mexico, could cause inventories to rapidly deplete.”

The Metals & Minerals index continued its meteoric rise, with a rise of 11.6 per cent.  Stellar gains were seen among base metals like copper, zinc and nickel, while precious metals also recorded strong gains.  The driving factors behind the price of base metals remained healthy demand, supply-side concerns such as strikes and investment fund buying, while precious metals were propelled by geopolitical risk factors, inflation concerns and US dollar weakness. 

“Low inventories, limited production growth, and the increased likelihood of industrial disputes, against a backdrop of solid demand, are expected to keep prices at elevated levels, though considerably below their excessive levels in mid-May,” stated Sweet.  “However, volatility is likely to be significant, as was highlighted late in May and early June when weekly prices for key metals plunged following a swing in market sentiment.”

The Forest Products Index maintained the flat trend seen since January with a 0.8 per cent increase in May.  Movements among the wood product and pulp and paper components were largely offsetting.  On the pulp and paper side both market pulp and newsprint prices remained on an upward track.  Among wood products, lumber prices fell slightly, while structural panels moved down more substantially in response to rising supply and high inventories. 

Work continued on the tentative agreement announced in April on the softwood lumber dispute between Canada and the United States, which authorities aim to finalize by the second half of June.  “Going forward, the Index is expected to exhibit a modest uptrend through the end of this year with gains in pulp and paper more than offsetting weakness in wood products,” according to Sweet.

Broad-based gains pushed the agricultural Index 8.3 per cent higher in May and 11.2 per cent above levels seen one year ago.  “The impetus for the gain came from concern about dry weather in several growing areas, particularly the southern U.S. Plains, and downward revisions to crop forecasts for major grains,” said Sweet.  “There is a risk that prices could spike in the coming months if adverse weather caused supplies to tighten further.”

BMO Commodity Index for May 2006

	May 2006 Level (1993 = 100)	Per cent change
		from month ago	from year ago
All Commodities	208.7	1.3	22.3
Oil & Gas	349.5	-3.4	18.9
Metals & Minerals	262.1	11.6	68.3
Forest Products	121.9	-0.8	2.2
Agriculture	113.4	8.3	11.2

The full BMO Financial Group Commodity Price Index report for May 2006 is available at www.bmo.com/economic.

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