Saudi Arabia needs to curb its over-production to steady world oil
TORONTO, June 27, 2012 /CNW/ - Scotiabank's Commodity Price Index inched
down by 0.1 per cent in May - the sixth consecutive monthly decline.
The All Items Index has fallen 15.9 per cent below its April 2011
near-term peak, just prior to the advent of concern over excessive
European 'sovereign' debt. However, the correction remains much less
than the 46 per cent slide in the second half of 2008.
"Concern over slowing global growth - as highlighted by weakening
Purchasing Manager Indices in the Eurozone, China and the U.S.
mid-Atlantic region and little progress by the Eurozone in dealing with
its financial challenges - have pulled down riskier assets such as
commodities and equities," said Patricia Mohr, Vice-President,
Economics and Commodity Market Specialist at Scotiabank.
"Disappointment that the Federal Reserve Board (the Fed) did not move
to support the U.S. economy through more aggressive monetary policy
easing - via a third round of quantitative easing (QE3) rather than
only a partial extension of the Operation Twist program - triggered a
further correction in oil and gold prices after the June 19-20, 2012
The Metal and Mineral Index fell by 3.0 per cent month over month (m/m)
in May to a level 14.2 per cent below a year earlier. Base metal prices
lost further ground, with London Metal Exchange (LME) copper falling to
US$3.59 per pound in May and a low of US$3.29 on June 8, 2012, before
rebounding to a still quite profitable US$3.33 in late June (yielding a
45 per cent profit margin). Zinc and nickel prices also remain at
lucrative levels, though aluminium is weak (falling below average world
cash costs, partly due to smelter expansion in northwest China).
The Oil and Gas Index advanced by 3.6 per cent m/m in May. Despite
declining international oil prices, Edmonton light, sweet oil and
Western Canadian Select (WCS) heavy oil rallied in May, with discounts
to West Texas Intermediate (WTI) oil narrowing. WCS (bitumen blended
with dilbit or synbit) rose from US$70.54 per barrel to US$75.01 in May
alongside less congestion on export pipelines to the United States as
well as a normal seasonal pick-up in demand.
"Saudi Arabia's deliberate over-production in 2012:H1 - to offset lost
Iranian oil due to sanctions and to prevent high oil prices from
derailing a fragile world economy - has contributed to a sharp plunge
in international oil prices in June, pressuring Western Canadian
crude," said Ms. Mohr. "Despite the coming July 1, 2012 European Union
embargo on the purchase or shipment of all Iranian crude, Brent briefly
dropped as low as US$88.99 on June 21from a near-term high of US$128.10
on February 24 amid global growth concerns and ample world inventories
(now at normal levels)."
The Forest Products Index continued to be a bright spot in May (+3.0 per
cent m/m), the fourth consecutive monthly gain. While other sub-indices
have fallen below year-ago levels, forest products have climbed
modestly above a year earlier (+4.1 per cent).
The Agricultural Index eased seasonally in May (-3.5 per cent m/m),
after strength over the spring. Canola prices (No.1 grade in store
Vancouver) fell back to a still lucrative US$651 per tonne from a
near-record US$673 in April. Wheat prices also lost ground.
"With the Canadian Wheat Board (CWB) no longer quoting 'asking export
prices' to the Canadian Grain Commission - given the end of its
monopoly in selling Canadian wheat in export and domestic markets - we
have shifted prices in the Scotiabank Commodity Price Index to
Minneapolis Dark Northern Spring Wheat (No. 1, high-protein 14 per
cent, delivered to the Great Lakes at Duluth)," said Ms. Mohr. "In the
past, the CWB's asking export price for No.1 grade high-protein 13.5
per cent CWRS wheat has been set in the context of Minneapolis Grain
Exchange (MGX) prices — the closest grade quoted on U.S. exchanges."
Turning to natural gas, NYMEX near-by futures prices appear to have
bottomed at US$1.91 per mmbtu (million British thermal units) on April
19, climbing to US$2.49 in May and US$2.68 in late June. Only the very
lowest-cost of the 'liquids-rich' natural gas shales such as Eagle Ford
and Marcellus can be produced profitably at prices below US$2. The
'dry' portion of the Marcellus requires US$3. Anticipation of a hot
summer across North America has also bolstered prices — both in the
United States and Canada.
Spot uranium prices remain at a low ebb. While prices inched up from
US$51.45 per pound in April to US$52 in May, prices have eased back to
US$50.75 in late June (partly reflecting the summer doldrums as well as
another planned barter sale by the U.S. Department of Energy).
However, anticipation of a recovery in market conditions over the
medium-term encouraged buyers to bid up base-contract prices for term
commitments to US$61.50 in late May (+US$1.50) — the first increase
since the Fukushima-Daiichi incident. China is expected to resume
approvals for new nuclear power plants soon.
Spot iron ore prices 62 per cent (Fe) delivered to Qingdao, China
(indicative of prices paid to Canadian producers in the Labrador
Trough) lost ground in May, dropping to US$136.67 per tonne from
US$147.65 in April. However, prices have steadied in recent weeks,
with China's steel production holding up at a high level. Gold prices
remain volatile, with the market looking for aggressive monetary policy
easing by the Fed or the European Central Bank.
Market conditions for potash are lacklustre, with the market dampened by
high producer inventories - reflecting a lack of new business in India
- and awaiting a third-quarter contract with China. India has cut
potash subsidies for farmers (likely due to budgetary constraints),
raising effective prices in India. However, buying by India should
resume around August. Volumes remain good into Brazil. Spot prices
(FOB Vancouver) edged down from US$480 per tonne in April to US$475 in
May, but remain above year-ago levels of US$445.
Scotia Economics provides clients with in-depth research into the
factors shaping the outlook for Canada and the global economy,
including macroeconomic developments, currency and capital market
trends, commodity and industry performance, as well as monetary, fiscal
and public policy issues.
For further information:
Patricia Mohr, Scotiabank Economics, (416) 866-4210, firstname.lastname@example.org; or
Joe Konecny, Media Communications, (416) 933-1795, email@example.com.