Toronto stock market surged Wednesday

TORONTO - The Toronto stock market surged Wednesday following a surprise jump in U.S. durable goods orders last month while investors took in a major deal in the Canadian oilpatch.
The S&P/TSX composite index moved up 130.2 points to 10,026.9 following a 63-point advance on Tuesday.
The rise was slight compensation for a 454-point plunge on Monday, which was triggered by a World Bank report that global economic contraction this year would be worse than thought.
Addax Petroleum Corp. (TSX:AXC) said Wednesday it has reached a deal that will see it be acquired by Chinese oil and gas giant Sinopec International Petroleum Exploration and Production Corp. for $8.27 billion. The wholly-owned subsidiary of China Petrochemical Corp. will pay $52.80 per share. Its shares closed Tuesday at $45.65 and on Wednesday its shares rose $5.10 to $50.75.
Overall, the energy sector was 1.5 per cent higher even as the August crude contract in New York lost 24 cents to US$69 a barrel. Suncor Inc. (TSX:SU) gained 47 cents to $33.63.
The Canadian dollar was up 0.49 of a cent to 87.45 cents US.
The TSX Venture Exchange was 3.78 points higher to 1,077.96.
In New York, the Dow Jones industrial average advanced 52.8 points to 8,375.7 after the U.S. Commerce Department reported a 1.8 per cent rise in May orders for big-ticket items. Economists surveyed by Thomson Reuters were anticipating a decline of 0.6 per cent.
"This is an amazing feat in the face of auto plant shutdowns and a still-fragile economy," said BMO Capital Markets senior economist Sal Guatieri.
"While autos/parts slid eight per cent due to the plant shutdowns and still-weak vehicle demand, solid gains in machinery and computers/electronics more than compensated. The reopening of Chrysler's plants in late June and GM's facilities in late July could extend the recent uptrend in goods orders."
The Nasdaq composite index gained 21.61 points to 1,786.53 while the S&P 500 index rose 7.15 points to 902.25.
The strong durable goods report comes ahead of the Federal Reserve's decision on interest rates and assessment of the economy, as well as data on new home sales.
The central bank will wrap up its scheduled meeting on interest rates at mid-afternoon.
The Fed is widely expected to leave its key rate unchanged at a range of zero to 0.25 per cent. Its outlook for the economy, however, is less clear.
Many investors bought into the market rally that started in early March on hopes for a late-year economic recovery.
The durable goods report overshadowed another report from the Organization for Economic Co-operation and Development (CD) said that the deepest global recession in over 60 years is close to bottoming out. But it warned recovery will be weak unless governments take further action to remove uncertainty over banks' balance sheets.
Elsewhere on the TSX, the base metals sector was almost three per cent higher as the price of copper gained six cents to US$2.26 a pound. Teck Resources (TSX:TCK.B) gained 73 cents to $18.57.
The financial sector gained 1.22 per cent with TD Bank (TSX:TD) ahead 62 cents to $56.55.
Investment management firm AGF Management Ltd. (TSX:AGF.B) said second quarter profits were down 61 per cent from a year ago to $17.2 million. AGF said profits and revenues were dragged down by continued global market weakness. Its shares were ahead 49 cents to $11.50.
The August bullion contract on the Nymex rose $14.60 to US$938.90 an ounce and the gold sector rose one per cent.
In other corporate news, software maker Oracle Corp.'s results for its latest quarter topped Wall Street's forecast Tuesday, despite a five per cent drop in sales and a seven per cent decline in profit. The company blamed the declines on the effects of a stronger U.S. dollar - which makes deals done in other currencies translate into fewer greenbacks. Companies also have been shelling out less for new software because of the recession.
Canadian dairy company Saputo Inc. (TSX:SAP) said Tuesday it has signed a deal to buy cheesemaker F&A Dairy of California Inc. Terms of the deal were not immediately available. Saputo shares added eight cents to $23.19.
Overseas stock prices were also higher.
Japan's Nikkei stock average gained 0.4 per cent while Hong Kong's Hang Seng rose two per cent.
Britain's FTSE 100 was 0.7 per cent higher, Germany's DAX index rose 1.43 per cent, and France' s CAC-40 climbed 1.25 per cent.

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The Oil Gusher!

Questerre Energy:significant leverage to a rising natural gas price

Globe says Questerre nicely leveraged to nat gas price

2009-06-18 07:17 ET - In the News

The Globe and Mail reports in its Thursday, June 18, edition that Marquest Asset Management manager Andrew Cook sees opportunity in Questerre Energy. Lois Lee writes in The Globe's BNN Market Call column that Questerre Energy stock slipped three cents to close Wednesday on the Toronto Stock Exchange at $1.58.

Questerre Energy has a one-year range of 78 cents to $5. Mr. Cook says: "The company's main asset is an interest in a large prospective shale gas field in the Quebec Lowlands. This provides significant leverage to a rising natural gas price."

In his general outlook Mr. Cook says: "While stocks have rallied significantly from their lows and may consolidate in the near term, we believe that the amount of monetary and fiscal stimulus, the steep yield curve, attractive valuation and cash on the sidelines ensure a continued upward trend in equity markets.

Outperformance will continue to come from emerging markets and the resource sector. From a strategic view, we have been taking profits in stocks that are overbought and redeploying the cash into stocks which demonstrate better risk/reward."

The price disconnect between oil and natural gas

Crude oil prices have risen above US$70, a new high since the cyclical low in February. Natural gas prices have failed to participate. In February, the ratio between the price of one barrel of oil and one million BTU's worth of natural gas was 8 to 1. That gap has since widened to a ratio of 18 to 1. Can the natural gas market continue to be disconnected to crude oil prices?

Most analysts of energy commodities will concede that, in the short run, fundamentals have little to do with energy price futures. It used to be that whenever there was an extreme contango occurred in crude futures (an upward sloping curve in forward contracts or when forward contracts are trading much higher than the near-month), investors were correct to identify that the upward pressure in the near-month would eventually narrow the contango spread. Now, investors in futures appear to be betting that the same will occur in natural gas futures. Maybe ... and maybe not.

The crude oil market is much different than the North American natural gas market, especially while we are at the depths of an economic recession.

The crude oil world is dominated by a small number of countries that dominate exports of crude oil (i.e. OPEC, Russia, Canada, and Mexico). An even smaller number of countries are able to achieve significant growth in exports (i.e. a handful of OPEC members, Canada, and few others). Thus, OPEC’s ability to balance the supply/demand fundamentals at any point in time can have a significant impact on average prices, despite the brief extremes we saw at the high last summer and the low this past winter.

Until about five years ago, the North American natural gas market was well connected to the crude oil price, because there was no unused capacity to increase production and the ability to grow production was quite weak. In fact, Canada’s supply growth since 1986 represented over 60% of the incremental demand in U.S. over that period of time. And in 2005, Canada’s supply growth peaked and has since been falling.

During the past five years, two new phenomena developed. Shale gas production in the Unites States, due to higher prices and new technology, caused U.S. domestic supply to grow rapidly, to all-time record levels.

At the same time, the capacity to import liquefied natural gas (LNG) into the United States was expanded to fill the expected gap from the decline in U.S. production. Now LNG has become a significant supply threat to North American producers during the summer months.

Excess supply of natural gas in the North American market is measured by the level of natural gas inventories, which are currently at record levels for this time of the year.

There are certainly positive signs that are driving the extreme contango in natural gas prices, when you look at winter contracts that are 50% higher than summer contracts. Commodity investors are looking at the collapse in U.S. rig activity which fell to 700 last week from 1600 last summer. They are betting on recovery in U.S. industrial activity. And they are looking at the disconnect between crude oil and natural gas futures.

However there are also signs that the commodity investors may be too early in their enthusiasm. Spot prices for natural gas (that’s the physical market) are well below the near-month futures prices, indicating that excess supply could continue to keep prices low for the rest of the storage injection season at the end of October. In Canada, spot prices are below C$3.00 per thousand cubic feet or US$1.00 per thousand cubic feet lower than U.S. spot prices.

Equity investors can play the natural gas price turnaround story by buying shares in gas-weighted companies with strong balance sheets. High debt levels will be a significant drag on capital investing either until higher prices generate higher cash flow, or until investor bullishness allows companies to issue new equity.

Patience will be a virtue in this natural gas cycle.