The torrid pace of commodity price increases that's been a hallmark of the last four years is likely over, BMO Financial Group forecasts in its latest outlook.

Bank economists predict that their commodity price index will drop four per cent in 2007. That's a "small step back" to an astonishing bull run that has seen its basket of commodities rise by an average of 18 per cent annually since 2003.

Nickel prices are expected to remain strong in 2007, BMO Financial Group says in its latest commodities outlook.
(Canadian Press/Inco)

"Looking ahead to 2007, the outlook for commodity prices is mixed," said BMO assistant chief economist Earl Sweet.

He said volatility "is likely to remain high in 2007 as hedge and other funds continue to exert a significant influence in the commodity markets."

BMO's forecast calls for crude oil to average $57 US a barrel in 2007. "Notwithstanding a sharp decline in oil prices during the first half of January, we expect market conditions to tighten during the second half of the year," said Sweet.

BMO also expects average natural gas prices to fall slightly from 2006 levels as inventories remain high, but to likely rebound in the second half of the year.

The metals and minerals index — which rose almost 50 per cent in 2006 as nickel, zinc, copper and aluminum all enjoyed substantial price increases — is forecast to remain relatively flat in 2007. BMO's forecast predicts that average prices of nickel and zinc in 2007 are likely to rise over last year, while copper and aluminum should ease.

The forest products sector is expected to have another tough year, as the smaller number of housing starts in North America cuts into lumber demand.

But agricultural prices are expected to advance further in 2007, BMO said. "The agricultural index is anticipated to advance by 3.5 per cent — extending a 10 per cent gain in 2006 — before easing in 2008 as current high prices and more normal growing conditions elicit higher output," Sweet said.