TORONTO, July 29 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, rose by 1.2 per cent
month-over-month in June, rising to a new record high for the sixth
consecutive month. The All Items Index is now 212.6 per cent above the
cyclical low in October 2001.
    The Oil & Gas Index led the way in June, surging five per cent
month-over-month and 71.7 per cent year-over-year. The strength in energy
prices was broad-based, but led by light crude oil and natural gas export
prices. West Texas Intermediate (WTI) oil rose from US$125 per barrel in May
to US$134 in June and surged to an all-time record high of US$147.90 on July
11 amid tight supplies and Middle East tensions surrounding Iran's uranium
enrichment policy.
    "Oil prices have retreated to the US$124 mark in late July, still
67 per cent above a year earlier," said Patricia Mohr, Vice-President,
Economics and Commodity Market Specialist at Scotiabank. "Market attention has
shifted from concerns over geopolitical supply risks and disappointingly slow
new oil field development to heightened concern over U.S. economic prospects,
following the Fed Chairman's semi-annual monetary policy report to Congress,
and easing U.S. petroleum consumption in reaction to record oil prices."
    The partial unwinding of a number of widely-held financial market
positions by investment funds has accounted for the steepness of the price
reversal. Hedge funds have heavily bought oil futures and options this year as
a hedge against a soft U.S. dollar and weak U.S. financial equities. However,
a recently steadier U.S. dollar (possibly temporary) and expectations by some
funds that U.S. bank stocks are close to bottom has triggered some unwinding
of long oil positions.
    Oil traders have focused heavily on the slowdown in U.S. demand (-3.2 per
cent year-over-year), largely ignoring ongoing growth in petroleum consumption
in China (up 6.5 per cent year-over-year in June), with world demand still
likely to edge up in 2008.
    "Canada's oil patch is, nevertheless, well positioned to benefit from
rising oil export volumes, a pick-up in Western Canada's drilling activity and
merger and acquisition activity this fall, spurred by record cash flow, and
commodity prices still expected to remain exceptionally high over the balance
of the decade," added Ms. Mohr. "Canadian drilling activity has already edged
up year-over-year in the second quarter of 2008."
    The report adds that the first phases of the Horizon project and the Long
Lake project, in Alberta's oil sands will come on stream in the second half of
2008. These projects represent one of the bright spots in the global supply
picture, amid alarming output declines in Russia, the North Sea and Mexico,
recently ignored by Nymex traders.

    Metals & Minerals

    The Metal and Mineral Index eased by 0.8 per cent in June, with most base
metal prices, except aluminium, loosing ground. However, sulphur prices at the
Port of Vancouver leapt to US$750 per tonne in June, up from US$660 in May and
only US$55 a year earlier, producing the biggest spike (up 1,264 per cent
year-over-year) in the history of the Scotiabank Commodity Price Index.
    Spot potash prices for overseas sales were unchanged in June at an
average of US$525 per tonne, but have jumped to US$762.50 in July. Following
the lead of Belarussian Potash Company (BPC), Canpotex has now sold
significant spot volumes for shipment to Asian markets in the fourth quarter
at US$1,000 cfr (delivered, standard grade) and has advised customers that all
new spot sales over the balance of 2008 to Southeast Asia, Brazil and Latin
America will be at the US$1,000 cfr level (US$1,025 for granular). This will
lift prices to about US$900 at the Port of Vancouver in the fourth quarter, up
211 per cent year-over-year. To handle increased exports from mine expansion
in Saskatchewan, Canpotex will almost double its West Coast port capacity by
2012, with a new terminal announced for Ridley Island and expansion at Neptune
Bulk Terminals in Vancouver.
    Spot uranium prices have also rallied back to US$64.50 per pound from a
low of only US$57 in mid-June. However, term contract prices fell from US$90
to US$80 in late June. Prices retreated earlier this year alongside lower
uncovered utility requirements, though discretionary buying to take advantage
of bargain prices has been substantial.

    Agriculture

    The Agricultural Index also fell by 4.4 per cent in June to a level still
29.6 per cent above a year ago. Wheat prices have lost significant ground
since spiking in February, with a bumper crop expected this year in Europe,
better growing conditions around the Black Sea and stepped-up international
plantings in areas such as Australia, spurred by higher prices. However,
current projections for 2008-09 are likely overstating the increase in world
ending stocks, given lingering dryness in Australia and Argentina.
    "U.S. corn futures have also tumbled on the Chicago Board of Trade from a
record US$7.55 per bushel on June 27 to US$5.73 on July 25, alongside lower
oil prices and as ideal Midwest weather boosted crop prospects, after the
worst flooding in 15 years," said Ms. Mohr. "While these developments have
soothed concern over food price inflation, prices remain well above year-ago
levels. The grain complex will rally seasonally later in 2008, with oilseeds
expected to outperform."

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