After reaching a record high in May, Scotiabank’s commodity price index, which measures price trends in 32 of Canada’s major exports, declined 4.8% month-over-month in June. The all items index remained 15.2% above a year earlier.

The metal and mineral index dropped sharply in June, as investment funds took profits in key base metals, concerned that further monetary policy tightening, possibly excessively so, by the U.S. Federal Reserve Board and other central banks to ward off inflation might substantially slow global growth. Temporary strength in the U.S. dollar also pushed down gold and silver prices. The oil and gas index retreated, as Canadian natural gas export prices slipped further, dampened by high U.S. inventories and as yet little recovery in U.S. industrial demand, hurt by the record prices of late 2005.

“London Metal Exchange nickel prices have outperformed in recent months, climbing to spectacular new heights of US$13.54 per pound on July 17, well above the previous US$10.84 record of March 1988,” said Patricia Mohr, vice president and commodity market specialist, Scotia Economics. “Compared with other base metals, nickel prices posted only a mild and very brief correction in mid-May. LME inventories have plunged to minimum levels of 4,674 tonnes in mid-July, the equivalent of only 1.3 days of global consumption, the lowest level in data back to 1989.”

Falling nickel stocks reflect strong global stainless steel demand, triggering large withdrawals from LME warehouses in western Europe, especially Hamburg. G7 stainless steel demand has stayed strong through the second quarter, with as yet little replenishment of stocks, after last year’s inventory correction, a development likely to sustain demand well into the second half of 2006.

After dropping sharply in June, copper, zinc and aluminum prices rebounded in July, with investment funds stepping up their positions again. LME copper prices have averaged US$3.50 per pound through July 27, up from US$3.26 in June, and not far from the monthly high of US$3.65 in May. The world supply and demand balance for refined copper was likely in deficit in the first half of 2006, with consumption exceeding production.

“In view of ongoing ‘geopolitical supply risks,’ we have lifted our forecast for WTI oil to US$71 per barrel for 2006 and to US$68 for 2007,” said Mohr. “Prices are likely to stay above US$60 for most of the remainder of the decade, providing a positive backdrop for the development of Alberta’s oil sands. However it should be recognized that development of a ‘greenfield’ integrated oil sands project (mining and upgrading) now requires a price of almost US$60 to yield a 12.5% pre-tax internal rate of return, given substantial capital cost escalation in Alberta over the past several years. Expansions of existing projects likely require less.”

WTI crude oil prices were largely flat in June at US$70.97 per barrel. Prices moved solidly to the US$70 mark in the second quarter alongside concern over ‘geopolitical supply risks’ related to the confrontation between Iran and the United Nations Security Council over Iran’s ‘uranium enrichment’ policy and further sabotage of oil facilities in Nigeria. The outbreak of hostilities in the Middle East drove prices to a new intra-day record high of US$78.40 on July 14. Although prices have drifted slightly lower in the past several weeks, with the realization that actual crude shipments (particularly from Iran and via Turkey) were not affected, prices remain high at US$74.54 on July 27.

Canadian natural gas export prices continued to slip in June, likely falling below US$6 per thousand cubic feet of gas (mcf), pushed down by more-than-ample inventories on both sides of the border. Nymex prices (one of the determinants of Canadian export prices) edged down to a low of US$5.52 per million British thermal units on July 7, before firming up to US$7.04 later in the month. U.S. markets began the ‘cooling season’ with a relatively high level of gas-in-storage, after a warm winter. However, hot summer temperatures and record U.S. electricity generation last week are starting to lift prices. During the week of July 22, U.S. temperatures were 33.3% above normal (the 30-year average) and 90.6% above normal in California.