The May 22, 2008 edition of Scotiabank’s Commodity Price Index says that due to constrained OPEC supplies, WTI oil prices are likely to rise to at least US$140 in the second half of 2008 and remain at elevated levels throughout 2009. Economist Patricia Mohr (author of the report) expects natural gas prices and other energy prices to follow oil prices in tandem. Furthermore, the report mentions that the sky high prices for palm oil & biodiesel have elevated potash prices to US$1,000 in Southeast Asia and this combined with a tripling in coking prices from Western Canada to Japan have led the Scotiabank Commodity Price Index to hit new highs in April.
Having hit consecutive record highs in every month this year, the all items index rose 5.7% over March and has now increased 197.2% from the cyclical bottom in commodities in October 2001. The report calculates that the current bull cycle in commodities has now exceeded “the huge expansion in the 1970s in the aftermath of the Arab oil embargo.”
On the back of potash prices which jumped from US$412.50 per tonne in March to a new record of US$504 in April and appreciation in premium grade hard coking coal prices for Western Canadian Producers after negotiations with Japanese steel mills to US$300per tonne from US$93 per tonne, the Metal & Mineral Index (sub index in the Scotiabank Commodity Price Index) jumped 12.1% over last March.
The oil and gas index (another sub index in the Scotiabank Commodity Price Index) also rose to record new highs in April, rising 6.8% over March and 52.9% from a year earlier. Mohr expects another increase in May for this index. She writes “Canadian producers are well positioned to benefit from record oil prices — as well as upward revisions to many price forecasts — with two major oil sands projects coming on stream in 2008:Q3 (the Horizon and the Long Lake projects) as well as major expansion of Suncor’s upgrading capacity. The Alberta oil sands are a ‘bright spot’ in a very tight world supply picture.”
The forest products sub index also gained 2.9% over March as western spruce pine fir 2x4 lumber prices increased from a low of US$192.50 per mfbm in March to US$233 in mid-May combined with a reserved seasonal rally and significant cutbacks at North American mills.
Lastly, the agricultural sub index fell 8.7% over March after reports that the USDA and the International Grains Council expect some improvement in the 2008-9 harvest. Although, Mohr does day that “Canadian Wheat Board prices at C$487 per tonne in early May remain 86% above a year ago.”
In a special section devoted to oil, Mohr writes that on the back of WTI crude hitting US$133.72 per barrel on the Nymex on May 21, 2008 she is rasising her WTI crude forecast to an average of “US$125 for 2008 (assuming prices of US$140 in the second half of the year) and US$135-140 for 2009. Sustained high prices are expected over the balance of the decade.”
Mohr points to government subsidies in emerging Asia and the Middle East artificially depressing prices for gasoline and diesel and massive money flows into commodities as a hedge aginst the depreciating U.S. dollar and inflation as reasons for the record high oil price. She pinpoints that “challenges in bringing on stream new oil fields in non-OPEC regions’ overwhelmingly account for today’s spectacular crude oil prices.” Mohr also mentions that 2008 will mark the third year when non-OPEC oil production has fallen short of estimates and will only meet 50-60% of world demand. Diggin deeper, she writes “While world oil production (outside of OPEC) had been expected to increase by over 1 mb/d in 2008, the actual net gain will be minimal at about 600,000 b/d (including biofuels) — covering only 60% of global demand growth of 1 mb/d or a mere 0.7% of world consumption (86.8 mb/d). The OPEC-Ten (particularly Saudi Arabia, with start-up of the 500,000 b/d Khursaniyah field) is making significant progress in stepping up its oil field ‘capability’, but has been reluctant to boost supplies, given the recent loss of purchasing power from a weak U.S. dollar and slowing global growth. However, during a recent visit by President Bush to Saudi Arabia, the Kingdom’s energy minister revealed that production had been increased by 300,000 b/d since May 10 ‘to meet global demand and compensate for other producers’ lower output’. Pipeline sabotage and a strike substantially cut Nigerian output in April and early May.” With declines in oil production arising from Russia and Mexico, Mohr is of the opinion that Russia and Kazakhstan “offer the greatest potential for expanding world oil supplies,” aside from the Canadian oil sands that is.
Click here to read the full report (Courtesy ScotiaBank)
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