Scotibank's Commodity Price Index eases in July
Fri 18 Aug 00
News Release
Ms. Patricia Mohr reports
After climbing in June, Scotiabank's Commodity Price Index report, which
measures price trends in Canada's major exports, declined by 1.8 per cent
in July. The All-Items Index remains 8.6 per cent above a year earlier and
23.9 per cent above the October, 1998, low.
"While pulp prices continued to gain strength in July, the Forest Products
Index declined as United States lumber and oriented strandboard prices
moved lower," said Patricia Mohr, vice-president and commodities
specialist, Scotia Economics. "Also in July, a moderate rebound in the
Metal and Mineral Index was more than offset by seasonal weakness in the
Agricultural Index and a temporary dip in oil and natural gas prices."
Ms. Mohr continued, "Going into the fall investment season, oil and gas
holds the greatest promise for investors within the resource industries."
West Texas Intermediate crude oil prices edged down to $27 (U.S.) to $28
(U.S.) per barrel in the second half of July, following Saudi Arabia's
announcement that it would boost output by about 500,000 barrels per day
throughout July and August to move prices closer to the mid-$20 (U.S.)
level. However, WTI prices still averaged $30 (U.S.) per barrel during July
and have bounced back to about $32 (U.S.) in mid-August.
"While Saudi Arabia increased output by 130,000 barrels per day in July --
which accounted for a large part of the 310,000-barrel-per-day increase by
OPEC -- the Kingdom's initial sales for September appear be to limited,"
said Mr. Mohr. "Control of OPEC policy now rests largely in the hands of
Saudi Arabia. Most OPEC countries are currently producing close to
capacity, with Saudi Arabia holding 75 per cent of unused capability."
According to the report, U.S. inventories of crude oil have also plunged to
the lowest level for August in 24 years. Though OPEC has boosted output in
small steps this year, increases have been skewed toward heavier, sourer
grades rather than the lighter gasoline-rich grades needed during the peak
U.S. summer driving season.
"U.S. refiners have not been able to take full advantage of rising OPEC
output because of the limited availability of hydro-cracking capacity to
process heavier grades and tighter product specifications requiring a
narrower set of feedstocks," said Mr. Mohr. "In fact, Saudi Arabia itself
may not be discounting its formula prices sufficiently to encourage much
additional buying."
Mr. Mohr continued: "Given the transportation costs and quality
differentials, the $25 (U.S.) target for the OPEC basket of crudes --
referred to by the Saudi oil minister -- implies a higher price of $27
(U.S.) for WTI. WTI is a much lighter crude oil than the OPEC basket and
will likely average $29 (U.S.) this year and $27 (U.S.) to $28 (U.S.) in
2001, up from only $19.24 (U.S.) in 1999."
In addition to low-crude oil stocks, the recent emphasis on gasoline
production by refineries in the United States has resulted in an
18-per-cent year-over-year plunge in U.S. middle distillate stocks,
including home heating oil. Though U.S. refineries will shift production
toward home heating oil in September, it will be a challenge to replenish
stocks before the winter heating season. This will reinforce strong natural
gas prices this winter, because some Canadian term export prices are tied
to home heating oil prices in the U.S. northeast.
Major international oil companies are beginning to shift focus from cost
reduction to production growth. However, it will take some time for
additional supplies to be generated.
While natural gas prices edged down in the United States in July, prices
have also rebounded strongly in August alongside rising crude oil and are
likely to move higher through the fourth quarter. U.S. gas-fired merchant
power capacity continues to be expanded and U.S. gas-in-storage is about 15
per cent below a year earlier. Alberta natural gas producers will enjoy
prices which are double 1997-1998 levels.
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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,
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