With commodity prices expected to soften in the face of the slowing U.S. and global economies, resources stocks probably won’t be on a tear this year. Nevertheless, a number of global money managers and strategists believe energy and base metals remain good places to be.

Most analysts expect oil, base metals and gold prices to remain high for the foreseeable future. There may be some softening, but that will be temporary. Canadians are in the enviable position of being able to take advantage of the resources boom by investing in home-grown companies, with which they are familiar and for which there is lots of information. And they can do it without political or currency risk.

Most forecasts for the price of oil are in the US$60-a-barrel range. A few analysts see it dropping as low as US$35-US$45, while a handful expect it to continue its climb toward US$100 a barrel.

As for base metals, many analysts believe prices will soften, although some think copper, nickel and zinc prices could remain strong.

Gold is a game apart, driven by investor concerns about inflation, the U.S. dollar and the possibility of increased political and social unrest in various parts of the world. Most analysts expect gold prices to rise this year, although not dramatically.

Forecasts range from US$650 to US$700 an ounce for 2007. (Gold ended 2006 at US$638 an ounce.) A number of forecasters expect further increases. Nandu Narayanan, chief investment officer at Trident Investment Management LLC in New York and manager of several funds for CI Investments Ltd. , sees gold hitting US$1,000 a ounce in the next three to five years.

Here’s a look at the resources subsectors in more detail:

> Energy. Although many global managers and strategists are underweighting energy this year, it still has some fans. Narayanan; Leo de Bever, chief investment officer at Victorian Funds Management Corp. in Australia; Peter O’Reilly, global money manager at I.G. Investment Management Ltd. in Dublin; and Ross Healy, president of Strategic Analysis Corp. in Toronto, all like energy plays.

For Narayanan and Healy, energy represents one of the few safe havens in a world likely to slide into recession. Both think oil is heading toward US$100 a barrel, even if there is some softening this year.

De Bever and O’Reilly, who don’t expect a downturn, argue that even with slower growth, firms supplying China, India and other emerging economies will continue to flourish.

Benoît Gervais, manager of several resources funds for Toronto-based Mackenzie Financial Corp. , and Dom Grestoni and Chris Holden, co-managers of a number of resource funds at I.G. Investment Management Inc. in Winnipeg, are all overweighting energy.

Most analysts agree that oil production is peaking and new supplies will have to be found. Unfortunately, it’s not certain how much more oil is needed because much of the production is in countries that don’t provide hard numbers on capacity and reserves. Nor is price an accurate gauge. Non-traditional players in the marketplace — mainly hedge funds — are affecting prices as they try to anticipate price movements, say Grestoni and Holden. On top of that, there’s political instability among many producers, adding a risk premium to the price — the exact level of which is impossible to guess.

As a result, it is difficult to forecast oil prices. Resources fund managers base their investment decisions on trends, themes, company fundamentals and valuations rather than on a firm view on price.

Mid- to large-cap exploration and production companies look good to Grestoni and Holden. Their funds include some U.S. names that have better outlooks or valuations than Canadian companies, and that diversify the portfolio.

They are underweighting energy services companies, however. Valuations are rich and the two fund managers expect exploration companies to exercise more discipline in relation to their activities, curtailing opportunities for services companies. Grestoni and Holden have bought a number of energy income trusts on weakness following the change to trusts’ tax treatment.

Gervais is working with a few themes. One is with production poised to fall, he should be holding companies that are either increasing output or cutting costs, thus improving margins.

Another theme revolves around exploration to find new supplies. As offshore drilling ramps up in Africa and Russia, services firms involved in offshore drilling are good bets. Gervais likes Noble Corp., which operates about 50 offshore rigs around the world.

@page_break@A third theme deals with refineries. As light-oil supplies diminish, refineries will have to be adapted or built to handle heavy oil, which requires more complex refining — in facilities such as U.S. firms Praxar Inc. and Air Products & Chemicals Inc. are building. There are huge amounts of heavy oil in China and the North Sea, as well as the Canadian tar sands.

The bottom line, says Gervais, is that just having the resources is not enough to increase earnings, The best returns will come from companies that are part of the solution to finding more energy.

Consolidation is probable as production companies seek to bolster their reserves. Canadian companies will be high on the list of targets because of Canada’s political stability and strong legal rules. Grestoni and Holden wouldn’t be surprised to see Britain’s Royal Dutch Shell PLC increase its offer for the shares of Shell Canada Ltd. that it doesn’t already own. Shareholders considered the first offer grossly undervalued.

> Uranium And Coal. Although a base metal, uranium is primarily used to generate energy. With high natural gas prices, interest in nuclear power is strong in many parts of the world. Cameco Corp., Canada’s biggest player, is currently out of production because of flooding problems. But, Grestoni and Holden note, there are more than 100 junior uranium companies in Canada.

Coal is another energy source that is attracting interest because it is inexpensive. Gervais likes Arch Coal Inc. and Peabody Energy, both based in the U.S.

> Base Metals. As with energy, demand for base metals will probably remain strong for years as developing countries industrialize, so this year’s softening is considered temporary. Furthermore, some base metals may do better than many expect this year.

Copper, nickel and zinc are in strong positions. O’Reilly thinks copper prices could rally this year, while strong demand will keep nickel and zinc prices around current levels. Grestoni and Holden agree that copper could surprise, but think zinc and nickel look extremely strong.

Craig Basinger, Richardson Partners Financial Ltd. ’s private-client strategist in Toronto, and Clancy Ethans, chief investment officer in Winnipeg, believe there could be opportunities in the subsector in the second half of 2007.

With the takeover of Inco Ltd. by Brazilian firm Companhia Vale do Rio Doce and the purchase of Falconbridge Ltd. by Britain’s Xstrata PLC, there are no longer any big Canadian nickel producers. But investments can be made in global companies such as CVRD, which O’Reilly holds, as well as Xstrata.

Teck Cominco Ltd. is a good way to get exposure to copper and zinc, and Grestoni and Holden also mention HudBay Minerals Inc. Then there is global player BHP Billiton. Rio Tinto Group also produces copper, along with a host of other products. Grestoni and Holden note that many smaller mining companies are also doing well.

Prospects for Canada’s other major base metal — aluminum — aren’t as bright. Canada doesn’t produce bauxite, the ore used to make aluminum, and developing countries — including China — are building their own aluminum smelters.

> Teel. Like aluminum, steel production is one of the first things a developing country puts in place. Certainly China is doing so. Gervais is investing in high-quality steel producers in Brazil and Russia.

> Gold, Platinum, Diamonds. Because the gold price is driven by investor sentiment rather than underlying demand, it’s a tough area in which to invest. It can be subject to long periods of low prices and can be very volatile. Some managers and strategists stay away from it; others think it should be treated as a short-term tradable investment.

Grestoni and Holden aren’t enthusiastic, noting the large overhang of gold reserves at European central banks. But Gervais thinks the current environment is a healthy one for gold, given mine depletion, low real interest rates and concerns about the U.S.’s big federal and trade deficits. He likes Iamgold Corp., which recently bought Cambior Inc.

Gervais also favours platinum. Three major players, all South African, control 90% of platinum production, and usage is growing because of its role in making auto catalysts.

Grestoni and Holden note there may be an issue of diamond supply, with South Africa’s De Beers Group looking at cutting production in Africa, making price prospects attractive.

> Forestry. Pulp and paper is favoured in this generally under-weighted subsector. The picks tend to be the lowest-cost producers, which are located in Brazil, including Suzano Papel e Celulose, Aracruz Celulose and Votorantim Pulp and Paper. IE