Commodity prices to ease in 2005: BMO

(January 17, 2005) Increased production, cooler demand and easing political tensions in the Middle East will spell the end of the commodity price rally, according to a forecast from BMO Financial Group Economics Department. Commodities from forestry, to oil, to minerals, all haveseen a run-up in value since mid-2002.

“Strong demand from China and the United States, the build-up of a sizeable risk premium in oil prices, and generally declining commodity inventories were prominent driving forces,” says Earl Sweet, assistant chief economist, BMO Financial Group. “But 2005 should see a retreat in the BMO Commodity Price Index, through lower anticipated prices for oil, wood products and agricultural products.”

December’s price index reading saw an increase of 0.8%, rounding out a full-year gain of 16.6% on the All-Items Index. But oil and gas prices declined in December and BMO economists predict crude oil will continue to fall throughout 2005, voicing optimism over tensions in the Middle East. Natural gas is expected to remain flat.

“Softer oil prices would primarily reflect strong global production and the unwinding of market concerns about tight inventories,” says Sweet. “However, with OPEC intending to rein in output to keep prices well above the cartel’s previous target range, the average price for U.S. benchmark West Texas Intermediate is projected to decline only moderately to U.S.$38 per barrel from an average of U.S.$41.50 in 2004.”

Slower global economic growth is expected to have an impact on the Mining and Minerals index, but prices should remain “elevated” thanks to the weak U.S. dollar and limited potential for supply growth.

One strong point in the overall index is that forestry should remain solid, with pulp and paper demand offsetting any decline in wood products. Agricultural commodities are expected to be softer, thanks to above-average harvests for grains and oilseeds in Australia and Argentina. Wheat is seen as the exception, as global appetite will continue to outpace production.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com