Some correction in high-flying oil and metal prices is expected this year but it will not be dramatic. Prices are expected to remain high over the medium term. Even a severe slowdown or recession is not expected to pull oil prices down to very low levels.

Metal prices could be affected, but the underlying demand from developing Asian giants China and India would push them back up. As a result, some money mangers remain overweight in one or both sectors, although others are taking a pause for the moment.

Managers are also divided on gold. Many are skittish, saying they find it hard to predict where gold is going, but some are enthusiastic, believing demand will rise from both consumers for jewellery, particularly in developing Asia, and investors, concerned about downward pressure on the US$ and geo-political uncertainty. A number of managers and strategists see gold going to US$600 this year from a recent US$519. Nandu Narayanan, chief investment officer at Trident Investment Management LLC in New York and manager of several funds for CI Investments Inc. , thinks it could go to US$1,000 in three to four years.

No one is keen on forestry, which is struggling under the weight of U.S. countervailing duties on softwood lumber, competition from low-wage countries and the high value of the C$, which shrinks returns in Canadian dollar terms.

There is a sleeper in the food area. Peter O’Reilly, global money manager for I.G. International Management Ltd. in Dublin, thinks this could be the next oil as millions of people in China leave farms for the cities where they’ll have to buy food. He is currently playing this through fertilizer and farm equipment firms.

Here’s what may be in store for 2006:

> Oil. Most economists, analysts, strategists and money managers assume oil will be US$45-US$55 this year, although some see it continuing to rise and a few think it will fall below US$40. Some of the price is a premium due to the threat of terrorism or politically generated supply disruptions, but those concerns probably won’t go away soon.

Long-term is another question. Alternative energy sources will be developed. There is a lot of emphasis on wind power, says Leo de Bever, executive vice president of global investment management at Manulife Financial Corp. in Toronto. Liquified natural gas is expected to become a factor in the next few years. LNG can be shipped, which will make natural gas a global product, rather than the continentally priced product it is today when it has to be transported by pipeline. New natural gas pipelines, such as the proposed Alaska and Mackenzie Delta pipelines, will boost supply. Coalbed methane, involving extracting methane gas from coalbeds, is being worked on.

Some money managers remain overweight on energy. These include Ross Healy, president of Strategic Analysis Corp. in Toronto, and Narayanan, who expect oil prices to remain high even during the severe recession both expect at some point in the next few years. Healy is keeping to Canadian companies. Narayanan, who says it isn’t “inconceivable” that prices could reach US$100 if growth is strong before the recession, likes Russia as well, saying that as well as being oil producers Canada and Russia are the only major economies without serious fiscal or trade deficits.

O’Reilly is counting on continued global growth combined with tight supply to keep prices high, although not climbing ever higher — he’s assuming oil will be above US$50 this year. De Bever also thinks resources will have another good year. Indeed, he thinks they will do well for the next 10 years.

Another is Dom Grestoni, head of North American equities and manager of Investors Group’s Canadian Natural Resources Fund in Winnipeg, who is a little overweight. He says stocks are not over-valued using a US$45-US$47 price for this year, and he expects forecasts of a 25% earnings’ gain will be revised up, given that the futures market shows US$55 three years out.

Others are not so bullish about the near-term. Both John Arnold, portfolio manager at AGF International Advisors Co. Ltd. in Dublin, and Bill Sterling, chief investment officer at Trilogy Advisors LLC in New York, which manages a number of CI funds, expect increased oil supply to take the edge off oil stocks this year. Arnold thinks oil prices will move down to US$30-US$40. Clement Gignac, chief economist and strategist at National Bank Financial Inc. in Montreal, is also underweighting energy, expecting prices to average US$45 this year in response to a slower U.S. economy.

@page_break@Benoit Gervais, resource portfolio manager at Mackenzie Financial Corp. in Toronto, says the short-term energy outlook is “an issue,” so he is underweight, but he believes returns will be above the historical average for another five years, but not dramatically so.

Costs are rising, up 20%-25% in refining and development for most companies. There is also a scramble for exploration skills, so wages keep climbing while efficiency is falling because of a scarcity of equipment. “The third or fourth quarter of 2005 could have the highest margins for a while.”

However, Grestoni says the industry in general is in the best shape to date, with record cash flows. Canada, considered a safe political environment, is centre stage with the oil sands, on which companies have been working for more than 20 years to improve technology and refining capacity. “We’re just getting started in terms of long-term production potential.” Grestoni’s portfolio is tilted toward large-cap senior producers who are either leading in oilsands or have a lot of natural gas. He also holds Precision Drilling Trust.

Gervais is underweight in the seniors but has a basket of small exploration and development companies. “Very few places in the world have the combination of reputable, experienced and competent management teams, a respected legal framework, open access to infrastructure and a good flow of properties.” He notes that big firms are selling little pieces to juniors.

Gervais is also overweight in oil and gas services, which are “on the right side of the inflation equation.” He particularly likes fracturing and offshore drilling.

Gervais also likes coal, which is cheaper than natural gas for generating electricity. “There is more technology available for making coal power cleaner, so we expect a new wave of coal plant construction in the U.S. over the next five years.” The U.S. has coal reserves for 100 years or more and much of that coal is cleaner than Alberta’s.

Gervais’ top 10 holdings include Transocean Inc. in the Cayman Islands, which has a young, high-quality drilling fleet; Thai Oil, a high-quality refinery that can deal with heavier or dirtier oil; U.S.-based Chevron Corp. and Petro-Canada, both with large refining capacity; and Calgary-based Pason Systems Inc., the world’s largest supplier of rental oilfield instrumentation systems.

> Metals. The key here is to supply the basic ores, not processed product. China is building processing capacity that will bring down prices and has the low wages to keep labour costs down. But it will always need basic inputs and is looking for iron ore and nickel, not steel. Gervais likes Inco Ltd., saying the merger with Falconbridge Ltd. will bring synergies, particularly in Sudbury. The company also has Voisey’s Bay nickel project, in Labrador, and Goro nickel project, in Australia. “Although expensive to buy and build, they will carry great rewards between now and the end of decade.” For iron ore, Gervais prefers CVRD in Brazil. “These are long-life, high-quality assets.”

He plays aluminum through alumina, the basic input made from boxite. He likes Aluminum Corp. of China Ltd. and Alumina Ltd. in Australia. The latter has more leverage because fewer tonnes are contracted over the long term.

O’Reilly likes copper, a sector that has been “under-invested” for years. “A lot of mines have closed and there is no new smelting capacity,” he says. “It’s like oil where there are no new refineries because refining stocks are trading at a fraction of replacement cost.”

Grestoni says copper, iron ore and nickel probably have the best prospects, driven by infrastructure spending in China and India. He says zinc producer Teck Cominco Ltd. and uranium producer Cameco Corp. are doing well and expects that to continue. “Cameco has a good reputation and stable, secure supply. The higher oil and gas prices go, the better uranium looks.”

> Precious metals. The gold price usually rises in times of economic or political uncertainty, and in response to demand for jewellery, which is expected to grow as incomes rise in Asia.

It isn’t just pessimists on global economic prospects who say holding gold — not stocks but bullion itself — is good insurance. Others include Gignac and Fred Sturm, chief investment officer at Mackenzie.

> Forestry. Grestoni has nothing good to say about forest products. Lumber is hurting because of the strong C$ and U.S. levies. On the paper side, there’s lots of supply and lots of producers in lower-cost jurisdictions such as Europe and Asia. Abitibi-Consolidated Inc. and Domtar Inc. are “both struggling, with 10- to 15-year lows in stock prices, profits under pressure and large debt loads. It’s the opposite of energy, with pricing weak, productivity poor and competition brutal.” IE