Canadian Manufacturing

Scotiabank’s commodity index falls in June amid broad weakness

Oil and gas saw biggest drop at 5.7 per cent, followed by 3.7 per cent decline in forest products



TORONTO—Scotiabank’s commodity price index fell by 4.1 per cent in June after rallying in May, the sharpest decline since late last year amid weakness in all sectors.

The report said oil and gas saw the biggest drop at 5.7 per cent, followed by a 3.7 per cent decline in forest products, three per cent in metals and minerals and 2.6 per cent in agricultural prices.

Commodities have been pressured since mid-June following comments by U.S. Federal Reserve Chairman Ben Bernanke, who mused about whether the Fed should begin tapering stimulus, triggering a selloff in precious metals, which lasted until it was clarified no such measures would be taken unless warranted.

Prices were also hit by a stronger US dollar on expectation of less liquidity, as well as by a temporary liquidity squeeze in China when the People’s Bank allowed overnight rates to jump over 30 per cent, unnerving markets overseas, the report said.

June’s declines are not, however, likely to last into next month.

“The index will be underpinned in July by a return to stronger oil prices in Western Canada and the beginning of another upswing in lumber and oriented strandboard prices, after a sharp, seasonal inventory correction,” said Patricia Mohr, Scotiabank’s vice president of economics and commodity market specialist.

She also noted that the closing of the price gap between West Texas Intermediate, a North American benchmark for lighter crude, and the world benchmark of Brent crude could point to stronger earnings for the second half of the year in Western Canada.

“After trading well below Brent in late 2012… and early 2013, WTI oil prices surged to US$108.05 on July 19, reaching virtual parity with Brent,” Mohr said in the report.

That jump came as traders anticipated an end to a oil supply glut at the Crushing, Oklahoma, hub and rapidly rising new supplies of “light, tight oil” and Alberta oilsands, which has kept WTI below Brent for the past three years.

Mohr also noted domestic and export markets are likely to see valuable opportunities from TransCanada’s proposed Energy East Pipeline project, which would open outlets for Alberta and Saskatchewan crude in Eastern Canada and export markets.

The project would allow access to less expensive and more secure domestic crude oil, she said, allowing displacement of imports into the Suncor Energy and Ultramar refineries in Montreal and Levis, Que., as well as the Irving Oil refinery in Saint John, N.B.

It would also mean greater access to stable supplies of domestic oil, improvement in the financial viability of current refineries and even eventually encourage development of a larger domestic refining industry in Quebec and Atlantic Canada, as well as provide much-needed new export outlets for Western Canada oil to Europe, India and the U.S.

“The development of overseas export markets remains vitally important for Western Canada’s oil industry,” Mohr said.

“With output in Alberta expected to climb annually by 225,000 barrels per day from 2013-22 plus growth in Saskatchewan, in an environment of rising U.S. domestic supplies, developing low-cost transportation infrastructure to access overseas export markets is critical.”

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