Oil and base metals prices are expected to remain strong this year, but are not likely to increase. In fact, oil prices are already at the top of the US$70- to US$90-a-barrel range that most analysts were expecting for this year — and the situation is similar in base metals.

Current base metals prices are already priced into the stocks, which is prompting resources fund managers to display a slight preference for energy — specifically, oil-related stocks whose valuations don’t yet reflect current prices.

This means there’s less interest in natural gas, as its price remains low, although there are some good investment opportunities. New technology has dramatically lowered the cost of accessing natural gas in certain geographical regions, so companies active in those areas can be doing very well.

Here’s a look at what investment fund managers are expecting in these subsectors:

> Energy. Most fund managers are bullish about the demand for oil and its price over the medium term because of strong growth in emerging economies.

However, there are contrarians. One is John Arnold, portfolio manager with AGF International Investors Co. Ltd. in Dublin, who believes that the price will fall to around US$35 a barrel in the next five years. His thesis is that Iran and Iraq will hook up with Western oil companies and increase their production to a combined 22 million to 24 million barrels of oil a day vs the current five million to six million barrels daily.

Another factor that could change the picture is the emergence of large supplies of natural gas resulting from multi-fracturing, or horizontal drilling, for shale gas deposits. The technology is new and low-cost, and the potential new supply in North America is very large. Already, this type of production is keeping down the price of natural gas — and it could pull down oil prices if many companies start shifting to gas from oil.

There are many potential investment opportunities among gas drillers using the new technology, including Calfrac Well Services Ltd., CanElson Drilling Inc., Canyon Services Group Inc., Trican Well Service Ltd. and Total Energy Services Inc.

And there are two other companies involved in shale gas that Bob Lyon, senior vice president and portfolio manager with AGF Management Ltd. in Toronto, recommends: Encana Corp. and Talisman Energy Inc. Encana is a pure natural gas play now that has spun off its oil operations; Talisman is in both oil and gas.

In the oilsands space, Chris Holden, portfolio manager with Investors Group Inc. in Winnipeg, favours Athabasca Oil Sands Corp. and Southern Pacific Resource Corp., while Joe Overdevest, co-manager of Fidelity Global Natural Resources Fund, prefers Baytex Energy Ltd.

Holden also recommends Paladin Energy Ltd. for uranium, for which he sees “very positive demand” in the next two years.

> Base Metals. Prospects for this subsector vary by metal. “We always ask what China needs,” says Darren Lekkerkerker, portfolio manager with Fidelity Investments Canada ULC in Toronto and co-manager of Fidelity Global Natural Resources Fund. Currently, China is very short on copper. In contrast, China has lots of zinc and aluminum smelters.

Other commodities for which supply is currently relatively tight include iron ore and metallurgical “coking” coal. Demand is very strong for iron ore, which is used in carbon steel, which in turn is used in buildings.

Teck Resources Ltd. is a play on copper that both Lekkerkerker and Holden recommend. In the next five years, Teck’s production of copper is expected to rise by 40% and its coal output by 50%.

For a pure copper play, both Lekkerkerker and Holden recommend Freeport McMoRan Copper & Gold Inc. Holden also likes Lundin Mining Corp., while Lyon favours Quadra FNX Mining Ltd.

Both Lyon and Holden favour Consolidated Thompson Iron Ore Mines Ltd., whose production is doubling with its new Labrador mine. Lyon also likes BHP Billiton Ltd. for both iron ore and coal. Lekkerkerker recommends Walter Energy Inc. for coal.

Another pick of Holden’s is Mercator Minerals Ltd. This is a play on molybdenum, a byproduct of copper mining that’s used to make high-quality, non-corrosive steel. IE