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A sharp correction in metal prices contributed to a fall in the BMO Financial Group Economics Department's Commodity Price Index in June after two consecutive months of gains. The Index fell 2.4 per cent in the month to 203.7 (1993 = 100), although this was still almost 14 per cent higher than the level seen a year ago.

June's drop in the Index was limited by an increase in prices for agricultural products, while Oil & Gas and Forest Products remained little changed. The metal correction almost completely reversed a surge in May that lifted some metal prices to all-time highs.

But the first half of July has already brought new volatility to commodity markets.  “North Korea's testing of longer-range missiles and increased violence in the Middle East have unsettled the international community, and have led to oil prices reaching new heights,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “For the rest of the year, we expect commodity markets to remain generally buoyant, though with heightened market volatility.”

The Oil & Gas Index remained essentially unchanged in June, with both crude oil and natural gas prices averaging very close to their May levels. “The index is now down 24 per cent from its peak in October 2005,” noted Sweet.  “The quiet of June, however, gave way to renewed feverishness in the first part of July, sending oil prices into new record territory.” 

In the North American natural gas market, pricing action has been muted by a calm start to the hurricane season and some climate projections suggesting hurricanes are less likely to occur in the Gulf Coast, where gas production and distribution infrastructure is located. Relatively mild temperatures so far have also reduced the demand for gas for power generation, through lower utilization of air conditioners.

The Metals & Minerals Index corrected sharply downward following its frenetic rise to a record high level in May. After ten straight monthly gains, the index fell nearly 10 per cent in June.  “Prices tumbled amid fears that rising interest rates would inhibit global economic growth and boost the attractiveness of the U.S. dollar as an investment alternative to gold,” stated Sweet.  “Nevertheless, low inventories for industrial metals, limited production growth, and continued solid demand are expected to keep prices at elevated levels over the rest of the year.”

The flat trend in the Forest Products Index since the beginning of the year persisted in June, with the sub-index easing down by a small 0.6 per cent. Movements among components were mixed. Market pulp remained on an upward track, while newsprint was unchanged and prices for both softwood lumber and structural panels fell. Going forward, the Index is expected to swing up seasonally in the near term before trending slightly lower later this year and in 2007.

“In early July, Canadian and US negotiators signed off on the final text of the softwood lumber trade agreement announced in April,” said Sweet.  “However, closing the seven-year deal will not be easy. Criticism is mounting in Canada, which might sap the required support.”

Wheat prices were solely responsible for pushing the Agricultural Index 3.1 per cent higher in June and 9.8 per cent above year-earlier levels. “The impetus for the gain came from concern regarding dry weather in key growing areas – the United States and Australia, for instance – and the associated downward revisions to global crop forecasts and stockpiles,” stated Sweet.  “Agricultural prices could move higher in the coming months if adverse weather caused supplies to tighten further.”

BMO Commodity Index for June 2006

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

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