Scotiabank Commodity Price Index Loses Ground for Fourth Consecutive Month

Western Canada's Light and Heavy Crude Oil Discounted due to Saturation of U.S. Midwest Refining Market; Export Markets to Asia are Needed

TORONTO, April 26, 2012 /CNW/ - Scotiabank's Commodity Price Index lost ground for the fourth consecutive month in March, declining by 2.9 per cent month over month (m/m). The All Items Index has dropped below a year earlier (-5.2 per cent) for the first time since October 2009.

"While the Agricultural (+5.7 per cent m/m) and Forest Products (+2.1 per cent) sub-indices rallied," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank, "these gains were more than offset by a sharp drop in Oil and Gas (-9.1 per cent) and a slight decline in Metal and Minerals (-1.1 per cent)."

While international benchmarks - Brent and West Texas Intermediate (WTI) oil prices - continued to climb in March to US$124 and US$106 respectively, both Edmonton light sweet and Western Canadian Select heavy oil prices fell. Edmonton light crude dropped to US$86 per barrel in March - about US$38 less than Brent and US$20 less than WTI.

Western Canadian Select (WCS) normally trades at a price discount to WTI oil (averaging US$17.79 per barrel from 2005-11), given quality differentials. However, the discount widened substantially from US$19.33 in February to US$31.44 in March and US$32.81 in April. While the differential will narrow to about US$19.70 in May, as spring asphalt demand for heavy crude picks up, it will remain wide.

"In Canada, Oil and Gas now has a huge impact on commodity price performance and the economy, accounting for 39.9 per cent of Canada's net exports of all commodities and resource-based manufactured goods in 2010," added Ms. Mohr.

"Unusually high price discounts on Western Canadian oil reflect over reliance on one key export market - the U.S. Midwest - and inadequate pipeline export capacity, especially to the faster-growing markets of Asia-Pacific," she said. "In coming years, various pipeline projects connecting Cushing, Oklahoma to U.S. Gulf Coast refining centres will help to narrow the currently wide price discount for WTI oil off Brent, in turn lifting Western Canada's oil prices. However, the 'commercial risk' of relying on one major export market will remain, particularly in light of the recent decline in U.S. petroleum demand and only slow projected demand ahead.  There is an urgent need to expand Canada's export pipeline capacity to tap the faster-growing markets of Asia."

Nymex natural gas prices slipped below US$2 per million British thermal units in mid-April.  While gas-targeted drilling has declined, a high level of development drilling of liquids-rich shales continues to boost associated gas production.  However, a number of medium-term developments could eventually lift prices.  Natural gas is currently nine times cheaper than crude oil - likely to spur the use of compressed natural gas in public vehicles (buses), some corporate fleets and heavy trucks.  In a reversal of the trend a decade ago, the U.S. is expected to emerge as an exporter of liquefied natural gas (LNG), mostly from the US Gulf Coast. Proposed LNG export terminals total 15.4 billion cubic feet per day (bcf/d) - equivalent to 21 per cent of current U.S. natural gas production in the Lower 48 States.  LNG prices delivered to Japan are over US$16 compared with North American prices at the US$2 mark.

The Metal and Minerals Index also eased back last month, as stronger copper and iron ore prices were just countered by an edging down in other base metals and lower gold prices. LME copper prices rose to a lucrative US$3.84 per pound in March, yielding a 52 per cent profit margin over average world breakeven costs.

A world class iron ore producing region is developing in the Labrador Trough and Nunavut Territory.  By 2021, Canada's iron ore production is expected to climb to 72 million tonnes from 41 million in 2011 - up 76 per cent.  Canada will move into 8^th position on the world stage.

Strength in canola, barley and Atlantic Coast Lobster prices produced a robust gain in Agriculture in March. Canola prices at Vancouver soared by US$89 per tonne to US$632 in March and advanced further to US$668 in mid-April — well above the US$622 of April 2011 — amid a strong favourable outlook for soybeans and other oilseeds. Strong canola and feed grain prices point to robust agri-business in Western Canada.

Finally, the Forest Products Index firmed up in March, with stronger lumber and Oriented Strand Board (OSB) prices. OSB has had a strong run this year, with prices climbing to US$211 per thousand square feet in the U.S. North Central region in March.

Scotiabank economists and market strategists are located in Canada, the United States, Mexico, Peru, Chile, Thailand, Hong Kong, the United Kingdom and France. The team provides in-depth commentary regarding the factors shaping the outlook for the global economy, currencies, capital markets and commodities as well as coverage of monetary and public policy issues.

Patricia Mohr, Scotia Economics, [phone], [email protected]; or

Joe Konecny, Scotiabank Media Communications, (416) 933-795, [email protected]