-   The U.S. credit crisis and swings in the U.S. dollar have contributed
        to the recent extreme volatility of commodity pricesTORONTO, Sept. 29 /CNW/ - After seven consecutive record highs,
Scotiabank's Commodity Price Index, which measures price trends in 32 of
Canada's major exports, dropped by 8.9 per cent month-over-month in August.
However, the All Items Index was still 33.9 per cent above a year ago and
remains above a year earlier in September, despite further slippage this
month.
    The Oil & Gas Index led the decline in August, tumbling 20 per cent
month-over-month, as plunging West Texas Intermediate (WTI) oil prices caused
a double-digit decline in Edmonton light crude oil and medium/heavy oil prices
at Hardisty, Alberta and an even bigger drop in Canadian natural gas export
prices.
    "The recent sharp decline in commodity prices, as well as the extreme
day-to-day volatility, reflects as much the impact of U.S. and global
financial market developments as it does actual world supply/demand
fundamentals for commodities," says Patricia Mohr, Vice-President, Economics
and Commodity Market Specialist at Scotiabank.
    The decline in WTI oil prices got underway in mid-July, as NYMEX traders
began to focus on easing U.S. petroleum consumption in reaction to high prices
and a soft economy and as Saudi Arabia pumped up production by a significant
495,000 barrels per day between May and July to cool prices. However, the
extreme price volatility, from a record US$147.90 per barrel on July 11 to a
low of US$90.51 on September 16, was heightened by investment/hedge fund
financial market re-positioning. "A U.S. dollar rally that began in June,
linked partly to some improvement in the U.S. trade picture, encouraged funds
to start reversing widely held positions put in place earlier this year (e.g.
long crude oil futures -- short the U.S. dollar), dampening NYMEX oil futures
even more," notes Ms. Mohr.
    The failure of a major U.S. investment bank and a widening credit squeeze
in mid-September heightened concern over the outlook for the U.S. economy and
global growth and pushed many exchange-traded commodity prices even lower.
While the subsequent announcement by the U.S. Treasury of a plan to create a
US$700 billion asset purchase fund to buy troubled mortgage-related assets
from financial firms led to a substantial relief rally in equity markets on
September 18-19, a huge increase in the projected U.S. budget deficit and
publicly-held debt triggered renewed U.S. dollar weakness.
    The slide in the U.S. dollar, combined with a short-covering squeeze on
the NYMEX, contributed to a sharp rebound in oil prices to US$120.92 on
September 22, up US$16.37 for the biggest daily increase on record. WTI oil
prices have subsequently eased to a still high US$102.14 early on September
29, underpinned by quite low inventories in the United States following
Hurricanes Gustav and Ike. "Supply challenges are expected to keep oil prices
high over the balance of the decade," comments Ms. Mohr.

    Base Metal Prices Have Likely Peaked For This Business Cycle

    After reaching a new record high in July, likely the peak for this
business cycle, the Metal & Mineral Index lost ground in August, as
broad-based declines in base and precious metals more than offset gains in
potash, uranium and molybdenum.
    "Base metal prices (especially zinc and nickel) have lost considerable
ground in recent months and will likely move irregularly lower over the next
several years alongside slower global growth and new mine development," says
Ms. Mohr. "However, the decline will be more limited than in past business
cycles, underpinned by stronger emerging market demand and double-digit
capital cost escalation. Copper prices remain exceptionally lucrative, still
yielding a 67% profit margin over average world breakeven costs, and should
outperform.
    International market conditions for potash also remain very firm. Spot
potash prices (FOB Vancouver) advanced from US$763 per tonne in July to a new
record of US$802.50 in August and will rise to about US$900 in the fourth
quarter of 2008, as all new spot shipments to Southeast Asia, Brazil and Latin
America rise to the US$1,000 cfr mark (delivered) for the standard grade and
to US$1,025 for granular.
    "Gold has maintained its traditional role as a store of value during
recent U.S. financial market turbulence, jumping back to US$902 per ounce on
September 26 from a low of only US$740.75 on September 11," added Ms. Mohr.
    The Agricultural Index also eased in August, with news of a bumper global
wheat harvest and as financial market difficulties spilled over into grain
markets. The Forest Products Index was the only sub-component to advance, as
lumber and OSB producers enjoyed a brief respite from exceptionally low U.S.
building activity. Prices climbed back to profitable levels, as U.S. dealers
were forced to restock to meet higher seasonal demand. However, a sustained
rally is not expected until late 2009.

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