(February 19 – 09:40 ET) – Economists from TD Bank say that after a record increase in 2000, the TD Commodity Price Index is expected to decline this year.

Energy prices are expected to drive the decline in the index. Over the course of 2001, energy prices are expected to fall by 33%. The end of the winter heating season and new output from record drilling activity is expected to lead to a 45% drop in the price of natural gas. Crude oil prices are expected to fall 1.4% in 2001, as the Organization of Petroleum Exporting Countries defends its position.

Non-energy commodity prices are forecast to be flat in the near term, as construction activity and industrial production will weaken, limiting any recovery from the weakness experienced in 2000.

“The fallout from the United States slowdown and generally lower world demand will put downward pressure on Canadian commodity prices in the near term,” says Craig Alexander, senior economist at TD Bank. By December of 2001, commodity prices on average are expected to be 13% below year-earlier levels.

“The tide is expected to turn in the second half of the year. Commodity markets are forward looking and early signs of a ‘V’ shaped recovery in the U.S. later this year should set the stage for a rally in most commodity prices, particularly forest products and base metals,” notes Alexander. Lower energy prices, easier monetary policy, and tax cuts are expected to lead to stronger U.S. economic growth by the fourth quarter of 2001.

TD says lower energy prices will limit revenue growth in the oil and gas industry, although they will remain at levels that are profitable for producers. Consumers will have more money, and factories will benefit from reduced production costs — both of which are supportive to economic growth.

The outlook suggests downside risks for the Canadian dollar in the near term. However, “a recovery in non-energy commodity prices in late 2001 and a modest 3% increase from January to December, suggests that the Canadian dollar will finish the year at close to US68¢,” adds Alexander.
-IE Staff