After a strong gain in August, Scotiabank's Commodity Price Index continued to rally in September.
"Easier monetary policy and liquidity injections by the European Central Bank, the Fed and the Bank of Japan boosted investor and business confidence in September," says Patricia Mohr, vice president, and economics and commodity market Specialist at Scotiabank.
Oil and gas led the gain in the index, with international oil prices only inching up after rebounding sharply from low levels in June and July. Both light and heavy oil prices in Western Canada, however, rose more than international benchmarks, with particular strength in Western Canadian Select (WCS) heavy oil.
"World oil prices are likely to remain at historically high levels over the next five years" said Mohr, in a special feature on oil markets. "Underlying developments, though, show a dramatic change in regional oil supply, demand balances and trade flows."
"How Canada responds to these changes will be critical in maintaining and enhancing our position as an energy superpower," adds Mohr.
The Metal and Mineral Index also bounced back, as broad-based gains in base and precious metals more than offset a slight decline in potash and uranium prices.
Improved investor risk appetite bolstered base metal prices, with copper rallying from US$3.40 per pound in August to US$3.65 in September and US$3.68 to date in October (currently at US$3.52).
In contrast, the Forest Product Index eased back in September after a strong pick-up in August. Oriented strand board (OSB) prices continued to spike, with U.S. North Central prices climbing to a very profitable US$347.50 per thousand square foot. U.S. linerboard producers also implemented the first price increase since April 2010, but these gains were more than offset by a decline in Western Spruce-Pine-Fir lumber prices.
Lumber prices snapped back in October, however, alongside another improvement in U.S. housing starts in September.
The Agricultural Index edged down last month, as gains in canola, barley and wheat were countered by a temporary fall-off in hog prices from almost US$80 per hundredweight to US$66. Inventory liquidation by hog farmers, in response to high feed grain prices, most likely accounts for this decline.
Regarding oil prices, the report says:
- Petroleum consumption in non-Organisation-for-Economic-Co-operation and-Development (OECD) markets will surpass demand in the OECD industrialized countries for the first time in 2014. Going forward, all of the growth in world demand will be in non-OECD countries, especially China, India, and in the rest of emerging Asia, as well as parts of Latin America, the Middle East and Russia.
- U.S. petroleum demand likely peaked in 2005. For the first time since 1949, the U.S. emerged as a significant net exporter of petroleum products last year, mostly to Latin American markets including Mexico and Brazil.
On the supply side, key developments include:
- U.S. oil and liquids production has posted a dramatic recovery in the past two years due to the rapid development of light, tight oil, such as the North Dakota Bakken—a trend likely to continue over the next five years. The U.S. will remain a net importer of crude oil in 2017, but its self-sufficiency will increase dramatically.
- In Canada, output is expected to increase from about 3.8 million barrels per day, with most of the gains in the Alberta oil sands.
- In 2013-2015, U.S. Midwest refinery upgrades will provide additional outlets for Canada's heavy oil in the U.S. Midwest and western Gulf Coast markets
"U.S. refineries in the eastern Gulf Coast currently import heavy crude from Brazil and Colombia, and competition for Western Canada from these areas could grow," says Ms. Mohr.
Changing oil market dynamics highlights the increasing commercial risk of Western Canada's oil patch relying largely on the U.S., and underlines the critical need to build additional pipeline and rail capacity to the B.C. coast. This could help us tap into the faster-growing markets of the Pacific Rim.