Scotiabank's Commodity Price Index Posts Milder-Than-Expected Correction in May

  • The IEA, led by the United States, releases strategic oil reserves to dampen oil prices and boost growth.
  • The Alberta oil sands -- building export capability to fast-growing Asian markets is vital.

TORONTO, June 28, 2011 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, declined by a modest 2.6 per cent month over month (m/m) in May, a much smaller decline than would have been anticipated from recent headline news on commodity and equity market developments.  The All Items Index remains 56.1 per cent above the April 2009 cyclical low.

"Over one-third of the commodities included in the Scotiabank Commodity Price Index, such as coking coal and potash, are not traded on exchanges - insulating them to some extent from day-to-day jitters over economic and financial market developments such as a mild growth slowdown in China," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.  "As such, the Index is likely a truer reflection of where aggregate commodity prices actually stand - and their impact on the economy - than indices based only on futures-determined prices."

Nevertheless, weakness was broad based in May, led by the Oil & Gas Index (-3.9 per cent m/m).  WTI oil - the bellwether for North America - fell from just over US$110 per barrel in April to US$101 in May and US$90 in late June. Saudi Arabia's decision to boost output unilaterally, following lack of an agreement at the June 8 OPEC meeting, and the June 23 announcement by the International Energy Agency (IEA) that it would release strategic stocks pared prices.

"The decision by the IEA - representing 28 industrialized oil-consuming countries - to release 60 million barrels of oil over a 30-day period is a substantial break with past policy," noted Ms. Mohr.  "In contrast to previous emergency releases - Hurricane Katrina in 2005 and Iraq's invasion of Kuwait in 1990-91 - the current release appears primarily intended to dampen oil prices and provide stimulus to a slowing U.S. economy and, to a lesser extent, the global economy."

The report also states that diversifying Canada's oil exports to Asia is vital.  According to Ms. Mohr, given the substantial forecast growth of Alberta oil sands production in the next 5-10 years (up 0.6-0.7 mb/d by 2015 and over 1.2 mb/d by 2020) in the face of only limited U.S. consumption gains - building further export infrastructure (pipelines or a unit-train system to the B.C. coast) to reach fast-growing Asian markets is vital for the Canadian economy.  China's petroleum consumption was up 8.8 per cent year over year (y/y) in May, though it edged down m/m, and has climbed 10.9 per cent to date in 2011. In contrast, U.S. petroleum consumption fell by 2.7 per cent y/y and will likely be largely flat in 2011.

Accessing Asian markets (China, Japan, South Korea, Taiwan and Singapore) would ensure world prices for Western Canada's oil.  WTI oil (a lighter crude than Brent) has traded at a US$12.78 per barrel discount this year to Brent (a truer world benchmark). While Brent has fallen back to US$105 in the wake of the IEA announcement, it is currently more than US$15 higher than WTI. To some extent, this unusual WTI discount reflects the buildup of rising Canadian shipments through new pipeline capacity to Cushing, Oklahoma (the pricing point for the NYMEX WTI contract) - as well as some rejuvenation of U.S. mid-continent oil output - with limited pipeline takeaway capability to US Gulf Coast refining centres. This discount may fade when Cushing is linked up to planned new pipelines to U.S. Gulf refining centres.  However, it will remain commercially very risky to rely on just one key export market.

The Agricultural Index bucked the trend in May, rising 0.3 per cent m/m, moderating the decline in overall commodity prices.  After easing seasonally this summer, agricultural commodities could be one of the strongest commodity sectors next fall, with record U.S. farm-gate prices for corn and wheat expected in 2011-12 - a positive for farmers and investors in fertilizers and agricultural equipment, but a risk for inflation both at home and abroad.

The Metal & Mineral Index eased by 2.3 per cent m/m in May, as moderately lower base metals, molybdenum, uranium and silver prices more than offset stronger gold, potash and cobalt. LME copper prices eased from US$4.30 per pound in April to US$4.05 in May, but are still exceptionally lucrative at US$4.08 in late June.

Meanwhile, potash prices continue to strengthen, with high grain and oil seed prices incenting strong fertilizer application in Brazil and Southeast Asia. Spot potash prices (FOB Vancouver) rose from an average of US$445 per tonne in May to US$481 in June (US$510 on the high side of the range towards month end) - up US$102 since December.

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.

SOURCE Scotiabank - Economic Reports

For further information:

Patricia Mohr, Scotia Economics, (416) 866-4210,; or
Patty Stathokostas, Scotiabank Media Communications, (416) 866-3625 or


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