- The OPEC-11 attempt to place a floor under oil prices.

    TORONTO, Dec. 22 /CNW/ - For the fourth consecutive month, Scotiabank's
Commodity Price Index, which measures price trends in 32 of Canada's major
exports, lost ground in November, tumbling 9.4 per cent month-over-month
(m/m). 2008 has been a tumultuous one for commodity prices, with the All Items
Index first soaring to a new record high in July and then plunging by 35.4 per
cent through November.
    "The shift from boom to bust in many commodities has been the most rapid
in the history of the Scotiabank Commodity Price Index, with data back to
1972, magnified by the exit of hedge and investment funds from commodity
market investments as well as a rapid markdown in anticipated global growth
from five per cent in 2006-2007 to only 1.5 per cent for 2009," says Patricia
Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.
"A spiraling down in business and consumer confidence, the intensifying credit
crunch and a sharp, sudden slowdown in global auto sales and G7 housing have
contributed to the rapid deceleration, as has recent data from China
indicating a marked deceleration in industrial activity."
    Ms. Mohr adds, in her report, that Scotiabank's Commodity Price Index
will likely fall further in the next six months alongside challenging
international economic conditions. However, a number of commodities should
outperform: gold, a hedge in uncertain economic times; potash, still at record
highs; and oil and uranium, if investors are prepared to take a two-year view.
After plunging since last fall, nitrogen fertilizer prices should rally back
as farmers plant crops next spring.
    The Oil & Gas Index led the decline in November, plunging 17.5 per cent
m/m. At their December 17 meeting in Algeria, the OPEC-11 agreed to cut output
by 4.2 million barrels per day (mb/d) from actual September 2008 levels of
29.045 mb/d as of January 1, 2009. This represents 14.5 per cent of OPEC-11
output or almost 5 per cent of world supplies (including biofuels). While
these cuts are large and should go a long way towards balancing world oil
markets, West Texas Intermediate (WTI) oil prices dropped further to only
US$33.87 on December 19, US$114 below the US$147.90 peak on July 11. "It will
be a challenge for OPEC to steady prices in an environment of plunging
expectations for world demand", says Mohr.
    OPEC's production cuts to shore up prices are motivated by two
considerations: firstly, WTI oil prices trading in the low US$40 range in
early December translated into prices of US$36-39 for the OPEC basket of
crudes, which is heavier and sourer than WTI oil. Prices have fallen below the
budgetary requirements of some OPEC countries. Secondly, at OPEC's informal
meeting in Cairo in late November, Saudi Arabia stated that a fair price for
crude oil is US$75, a level required to bring on stream new higher-cost
supplies, needed once the global economy returns to more normal growth.
    "In our view, a sharp global capital spending slowdown on new oil field
development, which now appears likely in 2009, will set the stage for tighter
markets and a big rebound in prices early next decade," said Ms. Mohr.
"Interestingly, the President of OPEC has pointed to the Alberta oil sands as
an area requiring higher prices." While oil prices will start 2009 on a weak
note, we expect WTI oil prices to average US$55 in 2009, rising to US$70 in
2010.

    Metals and Minerals Index falls sharply in November

    The Metal and Mineral Index fell sharply in November and has dropped
further in mid-December, with only potash and uranium prices advancing.
    LME zinc prices have fallen close to average world cash costs amid a
collapse in demand in the global auto and construction sectors, while almost
50 per cent of the world's aluminium smelters are not covering cash costs.
Molybdenum and cobalt prices have also tumbled alongside a sharp decline in
steel production (down 12.4 per cent year-over-year worldwide and down 17 per
cent in China in October) and an anticipated drop in global capital spending
in 2009. Government fiscal stimulus programs boosting infrastructure spending
in the United States, the Euro Zone and China should provide some offset to
the business investment slowdown as 2009 unfolds.
    Given lower ocean freight, the netback on spot potash prices at the Port
of Vancouver edged up to US$872.50 per pound. "Despite prospects for very slow
sales in early 2009, it appears that the major Canadian and Russian producers
are committed to keeping prices high by managing supplies," says Mohr.
    Spot uranium prices lifted off a US$44 per pound low in late October and
are currently US$53. While uncovered requirements by utilities will be low in
2009, India will return to the market in 2009 and prices should rebound to
US$70 medium-term.
    Gold prices have maintained their value well at US$839 per ounce in
mid-December. Prices have so far failed to climb back to the previous US$1,032
peak in March 2008, limited by a largely deflationary economic environment and
the recent flight to the safety of U.S. Treasury securities. However, renewed
U.S. dollar weakness from time-to-time, linked to a spiraling U.S. budgetary
deficit estimated at US$1.25 trillion, will underpin gold prices. Within the
base metals, copper will outperform, though prices have dropped to only
US$1.28 per pound (still yielding a slight profit margin).

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
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