Although most analysts believe longer-term prospects for energy and base metals remain excellent, they say current prices may be a bit ahead of themselves, suggesting that a pause is in order until demand catches up.

This is assuming that the U.S. economy grows only moderately, meaning prices could go higher if U.S. growth surprises on the upside. That said, prices also could pull back if the U.S. dips back into recession and/or China miscalculates and hits the brakes too hard.

Wild cards include stockpiling and speculation. The speed of the run-up in oil and base metals prices last year was unexpected. The quick recovery in China was a major factor for the increases, but the country has also been stockpiling key base metals and some analysts believe part of the increases are because of speculators. So, prices could come down, either because China has stockpiled more than it needs, even for continued strong growth, or because speculators will take profits and move on to other investment opportunities.

Although no one is quite sure how much a role speculation has played, John Arnold, a portfolio manager with AGF International Advisors Co. Ltd. in Dublin, suggests it’s been the major factor driving up prices in the past few years; he expects the price per barrel of oil to drop to US$35 and base metals prices to tumble as well. His thesis is that there’s no longer the money for speculation.

Oil supply is a hotly debated topic. Some, like Arnold, believe there’s plenty of supply available; he says Iraq could be producing as much as Saudi Arabia in 10 years.

Then there’s Jeff Rubin, former chief economist with CIBC World Markets Inc. in Toronto, now an author and speaker, who believes supply is already an issue that will become even greater in scope in the years ahead. He expects the price of oil to rise above US$100 a barrel yet again and keep climbing.

Somewhere in the middle is Fred Sturm, chief investment strategist with Mackenzie Financial Corp. in Toronto, who believes the world is underinvesting for the demand that will arise when the global economy has fully recovered; he expects new oil price highs around 2015.

Here’s a look at the major resources sectors:

> Oil And Gas. The dynamics of energy demand are changing with new technology in natural gas. Horizontal multi-fracturing drilling methods allow companies to access gas by drilling horizontally as well as vertically. The area around a vertical well is fractured and gas flows in from the sides, resulting in much greater production.

Although most consumers can’t switch to natural gas without buying new equipment, some industrial users are able to. But with sustained lower prices, more and more residential and business users will switch to gas equipment.

Lower prices for natural gas don’t mean that producers will become unprofitable; that’s because costs are also declining. And as many oil companies also produce gas, they will also benefit.

One of the companies that stands to gain from this trend is EnCana Corp., which is “incredibly well positioned” in several large, low-cost unconventional gas plays, says Bob Lyon, senior vice president and portfolio manager with AGF Funds Inc. in Toronto, who thinks investors will be “pleasantly surprised at the amount of growth and free cash flow generation.”

Another is Encal Energy Ltd., a small-cap firm involved in a few good gas formations in Alberta. Encal is benefiting from the new gas-drilling technologies and is trading at “a very attractive multiple of less than four times cash flow,” adds Lyon. He also likes Trican Well Service Ltd. and Calfrac Well Services Ltd., which both use the new technology.

Sturm prefers U.S.-based Petrohawk Energy Corp., which “should fare better and deliver more consistent growth than companies with traditional natural gas assets.” Sturm also likes offshore services companies, such as U.S.-based Cameron International Corp., which he says have fared better than onshore services companies, a trend he expects to continue.

On the oil side, Chris Holden, portfolio manager with Investors Group Inc. in Winnipeg, likes Petroleo Brasileiro SA, an integrated oil company that’s involved in Brazilian offshore exploration and is also looking at developing similar activity in Africa.

Holden and Lyon both like Canadian Natural Resources Ltd. It’s a well-managed company that has good leverage to the price of oil, says Holden. However, he admits, the creation of a carbon tax in the U.S. could pose challenges.

@page_break@> Base Metals. China is the main driver of base metals prices, says Lyon. It consumes four times as much steel and twice as much copper as does the U.S. It’s also a major consumer of most other metals.

Supply is an issue in some metals, Holden adds. Copper projects scheduled to come online in 2010-11 have been pushed to 2012-13; iron ore is also approaching tight supplies; zinc appears a little tight; and nickel could also be short. China has been “high grading” its nickel production, which means that it’s taking out the richest deposits. This can be done only for a limited time. If demand for stainless steel remains strong, China may have to import.

Holden likes Lundin Mining Corp., which has an ownership interest in the Tenke Fungurume copper deposit in Africa: “This could be one of the lowest-cost, high-grade deposits globally.”

Teck Cominco Metals Ltd., he also points out, “has done a remarkable job cleaning up its balance sheet and paying down debt, and is now looking for growth projects.”

First Quantum Minerals Ltd., says Lyon, has a “premium management team that has made its living by buying troubled assets from others and turning them into extremely well-run operations.”

Consolidated Thomson Iron Mines Ltd.’s main project is just coming onstream this year, and Lyon thinks its long-term upside is very significant. The firm has a “phenomenal land base in Quebec” and he expects it to expand on multiple fronts.

> Gold And Precious Metals. The price of gold has pulled back because the market is assuming U.S. interest rates will increase by June, Holden says. But he thinks that’s unlikely, given the slack in the economy. If he’s right, the price of gold is likely to move back up.

Sturm believes gold prices will continue to increase until around 2015 and may reach US$1,500-US$2,000 an ounce, while Lyon thinks gold prices could go up to US$1,300 and higher, and suggests stock prices are currently pricing in US$900-US$950 an ounce.

Lyon likes Eldorado Gold Corp. “It’s not the cheapest stock, [but] it’s a very, very well-run company with low-cost assets,” he says, noting that the company’s recent acquisition of Sino Gold Mining Ltd., an Australian-based company that operates in China, has huge upside.

Rainy River Resources Ltd.’s northwestern Ontario project is attractive and it looks like the deposits are greater than originally thought. Lyon notes that gold prices above US$700-US$800 will be profitable for the firm. IE