Surging Scotiabank Commodity Price Index Reveals Risk for Canada's Oil Patch

TORONTO, Jan. 27 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends for 32 of Canada's major exports, ended 2010 on a very strong note, jumping 5.5 per cent month over month (m/m) in December. The All Items Index climbed by 17.8 per cent through the year (since late 2009) and is now up 43.2 per cent over the April 2009 cyclical low.

Overall commodity prices strengthened further in early January.  "While prices retreated on January 20 on news that China's GDP grew by a faster-than-expected 9.8 per cent in 2010:Q4, up from 9.6 per cent in Q3, suggesting the need to tighten monetary policy further to stem inflation, we continue to believe that China's economy will expand at a healthy clip in 2011", said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "China's GDP should advance by 9.5 per cent in 2011, only slightly slower than the 10.3 per cent of 2010." 

Oil & Gas

The Oil and Gas sub-component led the way in December, surging 12.2 per cent m/m. Price increases were widespread - for light and heavy oil, natural gas and LPGs (propane). WTI oil - the reference price for North America - rose from US$84.31 per barrel in November to US$89.23 in December and has averaged just under US$90 to date in January. However, WTI oil prices have lagged Brent crude (a benchmark impacting prices for two-thirds of world oil supply) since August 17, with the discount widening to US$10 on January 26.

This reflects three developments: 1) the pricing point for the NYMEX oil contract is Cushing, Oklahoma - a hub with limited onward pipeline capability to U.S. Gulf Coast refining centres; inventories at Cushing have recently been near record levels, pushing down oil prices; 2) the relative strength of Brent crude oil given gradually declining production in the U.K. and Norwegian sectors of the North Sea as well as unusually cold weather in Northwest Europe this winter; and 3) a dominant position by a trading company in February Brent and Forties physical cargoes. 

"The wide discount for WTI oil off Brent highlights the commercial risk for Canada's oil patch of relying largely on one export market - the United States," stated Ms. Mohr. "This discount may narrow in several years when two proposed pipelines (the Keystone XL and the Monarch project) are constructed to the U.S. Gulf.  However, building more pipeline capacity or utilizing an existing rail link from Alberta (north of Edmonton) to the B.C. Coast for onward shipment to fast-growing Asian markets would guarantee world prices for the Alberta oil sands and other Canadian crudes. China's petroleum consumption rose by a sizzling 12 per cent in 2010, 19.1 per cent y/y in December."

Metals & Minerals

The Metal and Mineral Index also strengthened markedly last month (up 3.1 per cent m/m). LME copper was again a star performer, rising from US$3.84 per pound to US$4.15 in December and a new all-time record high of US$4.44 on January 19. The introduction on December 10 of the first copper ETF (exchange traded fund) in London, with two more to come in 2011- adding another investment layer to copper demand - and stepped-up copper imports into China (after a slow summer) boosted prices.  Spot uranium prices also continue to rally, jumping to US$70 per pound in late January amid thin spot market availability.  Utilities and investment funds are attempting to arrange supplies in view of the expiry of the HEU agreement in 2013 and China's recent term contracts, tying up a large portion of world supplies medium-term.

Contract prices for premium-grade hard coking coal (FOB Vancouver) will likely jump in 2011:Q2 (possibly as high as US$300) from US$225 in the current calendar quarter. Dramatically higher spot prices in Asian markets - the result of flooding in Queensland - will boost negotiated prices. Spot prices (FOB Australian ports) have jumped to US$355 per tonne in mid-January from US$253 in late December and US$228 last November. Australia accounted for 56 per cent of world seaborne trade in metallurgical coal in 2010, the bulk of which came from Queensland. The BHP Billiton Mitsubishi Alliance, Australia's largest coking-coal exporter, expects its operations to be affected for another six months.

Palladium prices (London PM Fix) rose to a near-term high of US$824 per ounce on January 19, 2011 amid strong investor interest - up from US$749 in mid-December - before dropping back to US$797 in late January. Palladium is expected to be the best performing of the precious metals this year. Car sales in China (a key growth market for palladium-based auto-catalytic converters used in small, gasoline-fuelled vehicles) will likely slow in 2011, after a sizzling 33 per cent advance in 2010, but should still advance by a double-digit 15 per cent.

Agricultural Index

The Agricultural Index posted the second-best gain of the sub-components in December, rising 8.2 per cent m/m. Broad-based increases in grain, oilseed (canola), livestock (cattle & hogs) and fish prices lifted agricultural prices 32.1 per cent above a year earlier. The Food and Agriculture Organization of the United Nations (FAO) noted that in December world food-related commodity prices surpassed the previous record in June 2008, with particular strength in sugar (at a record high), oils (e.g. soybeans & fish oil) and meat (likely pushed up by rising feed grain costs).

"We expect the agricultural environment to be one of the best ever seen for fertilizer application in 2011, lifting demand and prices for potash," added Ms. Mohr.

Forest Products

Finally, the Forest Products Index edged up in December (+0.8 per cent m/m, 20 per cent y/y). "Western Spruce-Pine-Fir 2x4 lumber prices continued to rally in early 2011, climbing as high as US$321 per mfbm, a profitable level for B.C. Interior producers and well above US$230 a year earlier," concluded Ms. Mohr. " While U.S. housing starts were still in the doldrums in December at 529,000 units annualized and are only forecast to edge up in 2011 to 680,000 units, anticipation of further sales growth to China, up 68 per cent year-to-date through October 2010, and restocking of low U.S. distribution inventories ahead of spring building boosted prices."

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, pat_mohr@scotiacapital.com; or
Patty Stathokostas, Scotiabank Media Communications, (416) 866-3625 or patty_stathokostas@scotiacapital.com


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