Commodity Price Index soars in February

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Scotiabank's Commodity Price Index, which measures price trends in Canada's major exports, surged by 6.4% in February to a level 30.5% above a year earlier. Gains over the past two months have been the third highest in the history of the All Items Index, with data back to 1972. The previous jumps occurred at the time of the Arab oil embargo in 1973 and in early 2001, when natural gas prices spiked during an exceptionally cold winter. 'The latest advance was led by another double-digit increase in the Oil and Gas Index, which rose 13.7% in the month of February alone, and 131% above the soft levels of a year ago,'says Patricia Mohr, Vice-President and commodities specialist, Scotia Economics. 'The Oil and Gas Index, including propane, climbed 75% above peak levels during the 1990-91 Gulf War - the result of geopolitical tensions, lower U.S. stocks of oil and refined products and fundamentally tighter North American supplies of natural gas.'

Non-energy commodity prices also rose by 3% in February, with gains in the Forest Products, Metal and Mineral and Agricultural Indices. 'While G7 industrial activity has softened since last summer, strong demand in China for a wide variety of materials has provided some offset - especially for nickel and copper,'comments Mohr.

West Texas Intermediate crude oil prices climbed from US$32.70 per barrel in January to US$35.73 in February. However, prices eased back to US$31.67 on March 18th, with Nymex traders unwinding long positions, expecting a short and successful U.S.-led military engagement in Iraq.

'Supply concerns are also easing,'says Mohr. 'While Iraq exports under the United Nations administered 'oil-for-food'sale are being suspended, as U.N. personnel leave Iraq, Saudi Arabia has given assurances that it will offset any potential Middle East supply disruptions. The Kingdom has already stepped up production from about 7.97 million barrels per day in November (prior to the Venezuelan oil workers'strike) to more than 9.2 million barrels per day in March and reportedly has stocks of more than 50 million barrels to offset any shortages.'

'The rest of OPEC - aside from Saudi Arabia, Iraq and Venezuela - has also increased output by about 910,000 barrels per day since November and Venezuelan flows are gradually recovering. The net result, OPEC is now likely producing at a rate above world demand for its crude oil,'says Mohr.

Nymex natural gas prices strengthened markedly in February, rising to US$6.66 per million British thermal units from US$5.38 in January. Concerns over rapidly dwindling stocks drove prices up as high as US$9.58 on

February 25th - almost triple year-earlier levels and approaching the daily peak of US$9.98 during the extremely cold winter of late 2000. As of March 7th, U.S. gas-in-storage dropped further to a level 55% below a year earlier.

'Natural gas prices have also slipped back to US$5.34 in mid-March with slower storage withdrawal, expectations of an end to the heating season on March 31st and some industrial 'demand destruction','adds Mohr. 'While prices may ease further during the second quarter, a period of seasonally weak demand, we continue to believe that natural gas prices have moved to a higher plane.'

The Metal and Mineral Index strengthened in February alongside widespread gains in base metals and gold. Nickel led the advance, rising from US$3.64 per pound in January to US$3.91 in February. Nickel-containing stainless steel consumption surged in China by 26% in 2002. China is relatively dependent upon imports of nickel to meet its burgeoning demand, with only one producing nickel mine.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

CONTACT: TEL: (416) 866-4210 Patricia Mohr, Scotia Economics TEL: (416) 933-1093 Michael Arbour, Public Affairs