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Gold, silver and a host of other commodity prices are in liftoff mode. But one important material isn't joining in the party: natural gas .

The fuel's price has been falling recently, and by many accounts, is likely to continue going that way, possibly for a long time.

While the front-month natural gas futures contract edged up Tuesday to $3.77 (U.S.) per million British thermal units, a rise of 1 per cent, it had fallen nearly 6 per cent over the previous three sessions. Earlier this year, it was flirting with $6.

If the downward trend continues, and many market players think it will, the lower prices will be a major drag on the earnings of North American energy producers with a heavy exposure to natural gas, although they'll be a boon to homeowners during the upcoming winter's heating season in the form of lower utility bills.

Prices are following the path of least resistance lower because of poor demand-supply fundamentals, according to market experts.

"It looks like there is still more supply growth to come, both from the U.S. and now potentially from Canada," said Martin King, vice-president of institutional research at FirstEnergy Capital Corp. in Calgary. "A lot of the demand growth seems to have stalled out."

Given the trends, prices are heading a lot lower, in his view. He said he "would not be surprised to see something" in the low $3 area.

The plunge in gas prices has caught some of the savviest energy market players off-side in their trades and pronouncements. Many of these investors had been touting gas as a money-winning contrarian play, with the commodity so unloved it was bound to rally. Natural gas in the past has had incredible upside sprints, and in late 2006 traded at near $16, making this year's levels seem cheap by comparison.

But the call to go long has either been wrong, or early, depending on the point of view.

The Toronto Stock Exchange-listed TBP Energy Fund managed by the legendary U.S. energy financier of the same name, was loaded up with natural gas stocks, such as Devon Energy Chesapeake and Encana along with a major futures position in the commodity, according to its most recent statement, for the period ended June 30.

The fund, sold to the public earlier this year at $10 a unit, has recently been trading around $7.50, for a loss of about 25 per cent from the initial offering, although the rally in oil prices has lifted the security from its August low of $6.75.

The fund manager could not be reached for comment.

Another prominent forecaster calling for higher prices was Henry Groppe, the octogenarian patriarch of highly regarded Texas petroleum consulting firm Groppe Long & Littell.

In April, he said prices, then fluctuating between $4 and $5 per million BTUs, would rally to more than $8 by last month. The call was based on a view that the current surge in output from shale gas deposits, the big reason supplies are increasing, wasn't sustainable. Mr. Groppe could not be reached for comment.

RBC Dominion Securities last month lowered its price projections for natural gas to $4.50 this year from $5, to $5 next year from $5.75 and its long-term level to $6 from $6.50.

"We believe the natural gas market will be amply supplied through 2011 but we expect natural gas prices to move toward $5.50 by year-end 2011" because of improving global economic growth, the bank said in its Global Energy Research publication.


The bank has downgraded gas-focused Encana to "sector perform" and reduced its target price to $35 from $37.

While the company is "one of the best-managed independents with superior execution capability" the bank said Encana's strategy to double its production volume per share over the next five years in the midst of high supply conditions is likely to weigh upon natural gas prices for years.

Among senior firms it favours are companies with more of an oil focus, including Canadian Natural Resources Ltd., Talisman Energy Inc., Husky Energy Inc. and Suncor Energy Inc.

Not all gas producers are unloved. Canaccord Genuity has four top buys among Canadian firms with market caps over $250-million (Canadian) that its analysts believe can return more than 25 per cent.

It estimates that Calgary-based explorer Fairborne Energy could rise 80 per cent; Progress Energy a mid-size producer focused on exploration, development and production in northwest Alberta and northeast British Columbia could rise 49 per cent; Daylight Energy a mid-tier producer in Western Canada has an upside of 48 per cent, and NuVista Energy has a potential return of 31 per cent. All of the companies have sizable exploration activities.

The weakness in natural gas pricing, while difficult for producers, has a silver lining for anyone using the fuel. Enbridge cut Ontario gas prices earlier this month by 15 per cent. The annual saving on a typical residential bill will be about $60, according to an estimate by the company.

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