- WTI oil prices likely to climb to at least US$140 in 2008:H2 and
    average higher in 2009 than in 2008

    TORONTO, May 22 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, reached new heights in
April, posting consecutive record highs in each month this year. The All Items
Index jumped by 5.7 per cent over March and has now advanced 197.2 per cent
above the cyclical low in October 2001. Over the same 6.5 year period, the
current upswing has outpaced the huge expansion which occurred in the 1970s
following the Arab oil embargo.
    This month's Commodity Price Index Report includes a special commentary
on the oil and gas outlook. Patricia Mohr, Vice-President, Economics and
Commodity Market Specialist at Scotiabank notes that West Texas Intermediate
(WTI) oil prices surged to a new Nymex intraday trading record of US$133.72
per barrel on May 21, more than double year-earlier levels of US$63.53.
    "Following a detailed analysis of global supply and demand developments,
pointing to very tight non-OPEC supplies, we are upwardly revising our WTI oil
price 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," says Ms. Mohr.
"Sustained high prices are expected over the balance of the decade."Observers point to many reasons for record oil prices, key among them:

    -  Government subsidies in much of emerging Asia and the Middle East,
       which keep consumer prices for gasoline and diesel fuel below world
       levels, limiting the impact on demand from record crude oil prices;
       and
    -  Huge investment inflows into hard assets such as oil as a hedge
       against a weak U.S. dollar and inflation risks from high food and
       energy prices."While important, our own analysis indicates that challenges in bringing
on stream new oil fields in non-OPEC regions overwhelmingly account for
today's spectacular crude oil prices," says Ms. Mohr. "Geopolitical supply
risks loom large in a world where the oil system is operating near full
capability. The interest by hedge funds largely reflects the perception of
very tight supplies and resource scarcity and does not represent a bubble. It
should be noted that the U.S. dollar has actually steadied since late March
and has had only a slight impact in boosting prices from US$100 to today's
US$133."
    Aside from the Alberta oil sands, Russia and Kazakhstan are two of the
regions thought to offer the greatest potential for expanding world oil
supplies. Russia, the world's second largest oil exporter after Saudi Arabia,
had been a bright spot earlier in the decade, with annual production rising
712,000 barrels per day from 2001-04 and 238,000 barrels per day from 2006-07.
However, output fell in the first four months of 2008 and is expected to be
flat-to-down, at best, this year.
    Oil consumption growth in 'China, other Asia and the Middle East' at an
estimated 950,000 barrels per day will account for the bulk of world demand
growth in 2008, with G7 consumption declining by roughly 420,000 barrels per
day, centred in the United States, and demand in the rest of the world
advancing by 480,000 barrels per day for an overall increase of one million
barrels per day. Asian demand growth may turn out even higher, given China's
strong 11 per cent year-over-year growth in apparent consumption in March, met
by robust imports of gasoil (diesel) used in agriculture and as a back-up in
case of coal-fired or gas-fired electricity shortages.
    Government subsidies, intended to reduce inflationary pressures, are
shielding consumers in much of emerging Asia and parts of the Middle East and
Latin America (Brazil) from extraordinary crude oil prices. As an example,
retail gasoline prices in China in mid-May at US$0.77 per litre and in
Malaysia at US$0.58 are much lower than US$1.01 for gasoline in the United
States and US$1.30 in Canada (including government taxes.) Subsidies are also
provided in India, Taiwan and Thailand, despite extraordinary costs to public
treasuries. Retail prices in India are relatively high at US$1.14 in four
cities, possibly reflecting state government taxes.
    Record crude oil prices, the bedrock for energy prices, are
understandably pushing up prices across the energy complex. Nymex natural gas
prices have rallied from a subdued US$7.39 per per million British thermal
units (mmbtu) in the fourth quarter of 2007 to US$11.64, a welcome development
for hard-pressed drilling companies in Alberta.
    "In view of the expected sustained strength in crude oil prices, we have
upwardly revised Nymex natural gas prices to an average of US$11 mmbtu in 2008
and US$11 in 2009," says Ms. Mohr. "However, with new LNG trains starting up
in the Middle East (in 2008:H2 and in 2009) and a rejuvenation in U.S. output,
natural gas in North America may remain a relative bargain."
    The Metal and Mineral Index led the way in April, leaping 12.1%
month-over-month. While most base and precious metal prices eased, huge gains
in coking coal and potash at the Port of Vancouver propelled the sub-index to
a new record high. Prices for premium-grade hard coking coal for Western
Canadian producers jumped from US$93 to US$300 per tonne. The Forest Products
Index also firmed up in April. However, the Agricultural Index lost
significant ground, as wheat prices slipped from record highs in late
February.

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shaping the outlook for Canada and the global economy, including macroeconomic
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