• WTI no longer a true benchmark for Alberta light synthetic crude oil.
• Copper prices rebound from an over-sold position in early October.  Inventories are modest in China. 

TORONTO, Oct. 28, 2011 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, fell by 1.1 per cent month over month (m/m) in September, the second consecutive monthly decline. The All Items Index has retreated by 6.2 per cent from the near-term high last April, just prior to the advent of financial market concern over sovereign-debt challenges in the Eurozone.

"The commodity price correction has been mild compared with the 40 per cent plunge in the second half of 2008," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "While exchange-traded commodity prices declined sharply in early October, prices for oil, copper and the grains have rallied back in recent weeks on optimism that measures would be implemented to shore up the Eurozone financial system and bolster liquidity, culminating in a broad agreement on October 27."

Nevertheless, a number of commodities not traded on exchanges (e.g. coking coal and iron ore) will likely be adjusted down in October, when quarterly contract prices are re-negotiated - dampened by uncertainty over global economic conditions and somewhat slower growth in China. The contract price for Western Canada's premium-grade hard coking coal will decline from US$315 per tonne (FOB Vancouver) to a still lucrative US$285 in October. While prices may recede further in early 2012, the medium-term outlook for premium-grade hard coking coal remains favourable. Only 35 per cent of China's domestic coal reserves are premium grade, while China requires 50 per cent for use in its larger blast furnaces. 

The Oil and Gas Index inched ahead in September (+0.7 per cent m/m). The gain reflected a surprising increase for both light crude oil in Edmonton and Hardisty Heavy crude in Alberta - the two prices used in the Scotiabank Commodity Price Index -- despite a slight decline in WTI oil.

"The price of WTI oil at Cushing, Oklahoma, the pricing point for the NYMEX contract, is no longer as relevant a marker as it once was for light synthetic crude oil from the Alberta oil sands," noted Ms. Mohr.

WTI oil prices edged down from US$86.34 per barrel in August to US$85.58 in September. Oil prices are particularly sensitive to sentiment on the global economic outlook, falling as low as US$75.67 on October 4, before rebounding strongly to US$93 on October 27 on news of the Eurozone plan and a pick-up in U.S. third-quarter GDP growth (+ 2.5 per cent from a mere 1.3 per cent in the second quarter). However, WTI oil prices continue to trade at a wide US$20 discount to Brent -- a better benchmark of world oil prices. WTI prices at Cushing, Oklahoma have been dampened by rising volumes of crude oil from the Alberta oil sands and the U.S. Mid-continent to Cushing in the face of onward pipeline constraints to refining centres in the U.S. Gulf Coast.

In contrast, the price of light synthetic crude oil (SCO) from Alberta (upgraded bitumen) has averaged US$103 per barrel in 2011 YTD - a US$9 premium over WTI oil. While this partly reflects upgrader outages in the Alberta oil sands, it also reflects a trend towards pricing SCO off its cracking parity with competing, higher-priced crude oil (such as Light Louisiana Sweet) in U.S. Midwest refining centres.

In September, the Metal and Mineral sub-component lost significant ground (-2.5 per cent m/m). Widespread declines in base metals and lower silver prices more than offset flat potash prices and gains in gold, sulphur, uranium and cobalt (a steel alloying agent).  LME prices for copper - the bellwether for base metals - dropped from US$4.10 per pound in August to US$3.77 in September and a low of US$3.08 in early October, before surging back to US$3.65 on the 27th.  Prices remain exceptionally profitable, yielding a 60 per cent profit margin over average world break-even costs including depreciation.

"Copper prices were over-sold in early October, given prospects for a supply deficit in the fourth quarter, that is, global demand will exceed refined metal supplies," concluded Ms. Mohr. "China stepped up its purchases in early October recognizing bargain prices, pulling down LME stocks in South Korea. At the height of concern over Eurozone prospects, traders appear to have focused their profit-taking on copper, as well as nickel, given its comparatively large margin over costs and where the bulk of long positions probably resided."

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.