TORONTO, Nov. 24, 2011 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, lost further ground in October, declining 3.7 per cent month over month (m/m). The All Items Index has fallen 9.8 per cent from its near-term peak in April - just prior to the advent of financial market concern over Eurozone debt challenges. While significant, the commodity price correction remains mild compared with the 40 per cent plunge in the second half of 2008.

"Many exchange-traded commodity prices such as copper and zinc have edged up in November and are above the lows of early October," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "However, intensifying economic and credit concerns in Europe have contributed to renewed downward pressure on prices in the past week. As well, the failure of the U.S. Congressional Committee to agree on the details of a further deficit reduction package, potentially leading to sequestration - automatic spending reductions of US$1.2 trillion starting in 2013 over a decade - has added to uncertainty."

The Metals and Minerals Index led the decline in October (-6.9 per cent m/m). Broad-based declines in base and precious metals - with an early-month selloff - and lower quarterly contract prices for Western Canada's coking coal more than offset a moderate increase in overseas potash prices. The price of premium-grade hard coking coal for Asian sales declined from US$315 to US$285 per tonne (FOB Vancouver).

Iron ore spot prices delivered to Northern China may have bottomed, after plunging in September-October. Chinese steel makers have been cutting stocks of construction-grade steel. Prices rebounded to US$148-151 per tonne in mid-November (+20 per cent in the past several weeks). Potash prices (FOB Vancouver) also inched up to US$502 per tonne in October (+43 per cent year over year), as Canpotex and BPC implemented a price increase in Brazil and Southeast Asia. Given uncertainty over the global economic outlook, producers may hold off on additional price increases until next year.

The Oil and Gas Index eased by -0.6 per cent m/m, as lower Edmonton par prices for light crude and a further decline in Canadian natural gas export prices to the United States just offset firmer heavy crude oil at Hardisty, Alberta and stronger propane prices. Light oil prices at Edmonton have rebounded in November to the US$95 mark.

Oil prices remain resilient. The spot price of North Sea Brent Blend - a world benchmark used to price some West African and Middle Eastern crudes - has inched up from US$110 per barrel in October to US$111 to date in November. WTI has jumped from US$86 in October to US$96 this month - with its discount off Brent narrowing. Prospective rail and pipeline developments will link new U.S. and Canadian oil plays to U.S. Gulf Coast refining centres, where international prices (Light Louisiana Sweet) prevail.

Pipeline and Rail Developments Alter North American Oil Market Dynamics

Spot WTI oil prices traded at only a slight discount to spot Brent (a world benchmark) in 2009 and much of 2010. However, the discount started to widen in the Fall of 2010, climbing to a record of almost US$30 per barrel on September 6, 2011 (also over US$29 in late September and mid-October).  Oil flows from new developments were arriving at  Cushing, Oklahoma, the pricing point for the NYMEX WTI oil contract, with limited pipeline takeaway capacity to refining centres on the U.S. Gulf Coast.

However, the discount on WTI has narrowed again to US$9-12 in mid-November alongside three developments:

1. Inventories at Cushing have dropped substantially from the April 2011 high (-23 per cent), with oil producers simply avoiding this hub and selling in other more profitable North American markets;
2. Rising rail shipments of Bakken light crude oil directly from North Dakota to St. James, Louisiana, diverting crude from Cushing; and
3. The November 16 announcement by a Canadian pipeline company that it will acquire a 50 per cent interest in the Seaway Crude Pipeline System and — together with a joint owner - will reverse its flow from Cushing to Houston (the largest refining centre in the United States). WTI oil prices jumped by US$3 to US$102.50 on the day of the announcement, though prices have since eased back to US$95.87.

"Despite these positive developments, Western Canada's oil patch will remain vulnerable to the commercial risks from selling the bulk of its oil to just one key export market - the United States - a market likely to post slow growth at best in coming years," noted Ms. Mohr.  "This vulnerability suggests the need to build a transportation system to connect the Alberta oil sands to one or more export terminals on the B.C. Coast for onward shipment to the growth markets of Asia - China, Taiwan, South Korea, Japan, and the Philippines. Timing is important, as Alberta crude must be placed in Asian markets ahead of other competing international oil plays."

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