-  Oil prices move into oversold territoryTORONTO, Nov. 27 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, plunged 15.6 per cent
month-over-month (m/m) in October, the sharpest monthly decline in the history
of the Index.
    The sudden and unusually sharp decline since the July peak (-28.8 per
cent) reflects the exit of many hedge funds from long commodity futures
positions and commodity index-linked investments, forced by fund redemptions
and tighter credit, as well as a shift to record short positions by funds and
trading companies.
    "Recognition that much of the G7 economy is now contracting has also
pushed down prices," says Patricia Mohr, Vice-President, Economics and
Commodity Market Specialist at Scotiabank. "Global economic prospects have
been marked down further, despite a massive fiscal stimulus package just
announced by China. World growth is now expected to advance by less than two
per cent in 2009 compared with GDP gains of five per cent in 2006 and 2007."
    Within the sub-components, the Oil & Gas Index led the decline in October
(-21.8 per cent m/m) and will drop further in November. West Texas
Intermediate (WTI) oil at US$54 per barrel in late November is almost US$100
per barrel lower than its US$147.90 peak on July 11, 2008, though prices have
edged up in recent days. However, oil prices are oversold at the US$50 level.
Should prices be sustained around US$50 in 2009, much needed capital spending
on new field development will be curtailed in higher-cost producing regions of
the world, setting the stage for a strong recovery in prices in the early part
of the next decade.
    "Given very bearish sentiment on the health of the global economy, oil
prices recently have been determined as much by U.S. and international
economic indicators and equity market developments as by specific oil-industry
developments," says Ms. Mohr. "Global petroleum consumption should be largely
flat in 2009, with a significant drop in the Organisation for Economic
Co-operation and Development (OECD) region offset by some gain in emerging
markets.
    "Saudi Aramco and major oil companies will maintain most of their
upstream development projects in 2009, given recent record cash flow and a
long-term view of oil prices," adds Ms. Mohr. "However, at today's capital
costs, US$50 oil is insufficient to justify development of new fields in
higher-cost areas, such as the deepwater offshore Brazil, Angola and Nigeria,
many Alberta oil sands projects, heavy oil projects in Venezuela, most Arctic
development, many enhanced oil recovery (EOR) projects and many oil shale
developments."

    Potash prices remain at record highs

    The Metal & Mineral Index lost significant ground in October, though the
Index remained 5.1 per cent above a year earlier. Double-digit declines in
base metals, sulphur and uranium, and a more moderate drop in precious metals
swamped an increase in potash prices (one of only two commodities to increase
in October).
    Average spot prices for potash (FOB Vancouver) edged up from US$862.50
per tonne in September to US$869 in October (a new record high of roughly
US$1,000 delivered in many offshore markets) and remain at this level in
November.
    While the spot market has turned quiet, Canpotex (representing Western
Canada's three major potash producers) was awarded most of the recent Felda
tender in Malaysia at US$1,000 cfr (delivered) for the first quarter of 2009.
Canpotex has also negotiated two lucrative contracts with Japan and South
Korea for first-half 2009 shipments (up US$200-$220 to Japan).
    "While annual contract negotiations with China may not be concluded until
next year, prices to China will likely increase to at least US$700-800 over
current price levels of about US$570 (FOB Vancouver), as China is paying
prices well below market levels," says Ms. Mohr. "The net result, though
potash producers may offer somewhat lower prices to get shipments moving in
the first half of 2009, prices will remain high and lucrative."
    Spot uranium prices dropped from US$60.40 per pound in September to US$46
in October, reaching a low of only US$44 on October 20, with forced
liquidation by hedge funds and other investors facing cash flow difficulties.
However, prices have recovered to US$55 in mid-November, with a large increase
in spot buying by Asian utilities, traders and producers taking advantage of
bargain prices. India will resume buying uranium concentrates next year,
following agreement by the Nuclear Suppliers Group.

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