Scotiabank Commodity Price Index Snaps Back in September

• Positioning Canada as an Energy Superpower, Amid Shifting Global Trade Flows
• Spot Iron Ore Prices Rally Back in China in October 
• Equity valuations strengthen for Canadian forest products companies  

TORONTO, Oct. 29, 2012 /CNW/ - After a strong gain in August, Scotiabank's Commodity Price Index continued to rally in September, climbing 3.8% month over month (m/m).  The All Items Index approached levels last seen in March 2012 and is now 13.8% below the near-term peak in April 2011 - just prior to the advent of concern over Eurozone sovereign debt and the negative fallout on global growth.

"Easier monetary policy and liquidity injections by the European Central Bank, the Fed and the Bank of Japan - to shore up a struggling world economy - boosted investor and business confidence in September, lifting 'riskier assets,' such as commodities and equities," said Patricia Mohr, Vice President, Economics and Commodity Market Specialist at Scotiabank.

Oil and gas led the gain in the Scotiabank Commodity Price Index (+8.8% m/m) last month. International oil prices only inched up, with Brent rising from US$112.68 per barrel in August to US$113.02, after rebounding sharply from much lower levels of just under US$103 in June and only US$96 in July. Similarly West Texas Intermediate (WTI) oil edged ahead to US$94.56.  However both light and heavy oil prices in Western Canada rose more than international benchmarks, with particular strength in Western Canadian Select (WCS) heavy oil. The WCS discount appears to narrow seasonally in the autumn alongside less refinery maintenance in the U.S. - the destination for the vast bulk of Canadian oil exports.

The Metal and Mineral Index bounced back in September (+2.2% m/m), as broad-based gains in base and precious metals more than offset a slight decline in potash and uranium prices and lower iron ore. Improved investor risk appetite bolstered base metal prices, with copper rallying from US$3.40 per pound in August to US$3.65 in September and US$3.68 to date in October (currently at US$3.52).

In contrast, the Forest Product Index eased back in September (-1.6% m/m) after a strong pick-up in August. Oriented strand board (OSB) prices continued to spike, with U.S. North Central prices climbing to a very profitable US$347.50 per thousand square foot. U.S. linerboard producers also implemented the first price increase since April 2010 - up US$50 to US$690 per short ton. These gains were more than offset by a decline in Western Spruce-Pine-Fir 2x4 lumber prices from a strong US$310 per thousand board feet in August to a still lucrative US$296.  However lumber prices have snapped back in October (currently at US$313) alongside another improvement in U.S. housing starts in September (872,000 units annualized, up from a mere 647,000 a year earlier).

The Agricultural Index also edged down in September (-0.4% m/m). Gains in canola, barley and wheat were countered by a temporary fall-off in hog prices from almost US$80 per hundredweight to US$66.  Inventory liquidation by hog farmers, in response to high feed grain prices, probably accounts for this decline, though lower farrowing intensions across North America will boost prices next year.

"World oil prices are likely to remain at historically high levels over the next five years," said Ms. Mohr, in a special feature on oil markets. "However underlying developments show a dramatic change in regional oil supply and demand balances and trade flows.

"How Canada responds to these changes will be critical in maintaining and enhancing our position as an energy superpower," added Ms. Mohr.

According to the report, some of the underlying developments on the demand side include:

• Petroleum consumption in non-Organisation-for-Economic-Co-operation and-Development (OECD) markets will surpass demand in the OECD industrialized countries for the first time in 2014. Going forward, all of the growth in world demand will be in non-OECD countries, especially China, India, the rest of 'emerging Asia,' as well as parts of Latin America, the Middle East and Russia.
• U.S. petroleum demand likely peaked in 2005.  For the first time since 1949, the U.S. emerged as a significant net exporter of petroleum products last year, mostly to Latin American markets including Mexico and Brazil.

On the supply side, key developments include:

• The bulk of non-Organization-of- Petroleum-Exporting-Countries (OPEC) supply increases from 2012-17 are projected for the U.S. and Canada (almost 75%) - centred in the development of the Alberta oil sands, light, tight oil through horizontal, multi-fracturing drilling technology (particularly in the U.S.) and new sources of 'Natural Gas Liquids (NGLs such as ethane, propane and butane) produced alongside natural gas shales.
• U.S. oil and liquids production has posted a dramatic recovery in the past two years due to the rapid development of light, tight oil, such as the North Dakota Bakken - a trend likely to continue over the next five years.  The U.S. will remain a net importer of crude oil in 2017, but its self-sufficiency will increase dramatically.
• In Canada, output is expected to increase from about 3.8 million barrels per day (mb/d) (including NGLs) to 4.9 mb/d, with most of the gains in the Alberta oil sands.
• In 2013-2015, U.S. Midwest refinery upgrades together with Seaway and Keystone pipeline expansions (including the assumed approval of the Keystone XL Pipeline in early 2013) will provide additional outlets for Canada's heavy oil in the U.S. Midwest and western Gulf Coast markets (Texas).

"However U.S. refineries in the eastern Gulf Coast currently import heavy crude from Brazil and Colombia and competition for Western Canada from these areas could grow," said Ms. Mohr.

Changing oil market dynamics highlight the increasing commercial risk for Western Canada's oil patch of relying largely on one major export market - the U.S. - and the critical need to build additional pipeline and rail capacity to the B.C. coast to tap into the faster-growing markets of the Pacific Rim.

Scotiabank 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.

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SOURCE: Scotiabank

Patricia Mohr, Scotiabank Economics, [phone], [email protected]; or
Devinder Lamsar, Media Communications, [phone], [email protected].