The Daily Investor » Commodities

How to Make Volatility Your Friend

Pierce Points — Mon, 05 Jul 2010 02:12:06 +0000

We’re living in an age of commodities volatility.

The last ten years have seen a number of big price swings for many natural resources. Uranium ran from $10 to $140, and then back to $40. Oil hit $145 then plummeted back to $35. Copper went from $4 to $1.25 and then back to $3.50 (and now back below $3).

As the saying goes, if you don’t like the price, wait five minutes.

These swings don’t go unnoticed. Especially by end users of these commodities.

Companies that use copper, oil, natural gas, nickel, phosphate, aluminum and a host of other commodities as inputs are faced with a challenge. How do you plan your project economics when costs keep pin wheeling?

One way is hedging. Lock in an acceptable price through the use of swaps, collars, futures, options and other derivatives. We are seeing more of this (particularly on the petroleum side).

But hedging requires a certain degree of sophistication, a staff dedicated to managing the hedge programs, and often comes with financial costs for executing these trades.

There is another solution. Integrate.

If you’re a steel-maker worried about iron ore prices, buy an iron ore mine. Now if iron ore prices rise, you pay the increase to yourself. Keeping profits high. And if prices plummet, the loses on the mining business can be made up by increased margins on steel.

This “hedging by ownership” is becoming a more common strategy as users recognize that commodities volatility is here to stay. This weekend, India’s Reliance Power announced it will merge with natural gas producer Reliance Natural Resources. Reliance Power is largely an end user of gas, managing a portfolio of gas-fired power plants across India. Buying Reliance Natural Resources gives the company assured access to (and guaranteed revenue from) natural gas supplies.

Of course, this deal is a little cozy as billionaire Anil Ambani owns both companies. And there are some other benefits to both companies in terms of streamlining government permitting. But the synergies in being both supplier and end user of a commodity certainly played into the deal.

We’ve also seen of late fertilizer companies getting into the natural gas exploration business in places like Canada and Chile. Many big oil companies are already integrated by owning producing wells and refineries. Steelmakers in Asia are buying coking coal and iron ore mines. Copper smelters are looking at funding porphyry exploration.

It’s interesting to think what might be next. How about aluminum companies investing in geothermal power? Nuclear power operators buying into uranium mines? (They got burned on this last cycle, so it might take awhile.) Housing developers getting into copper development?

Here’s to going vertical,

Dave Forest
dforest@piercepoints.com

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

Fireworks in the Markets 7/2/10

Matthew Bradbard — Fri, 02 Jul 2010 02:06:18 +0000

Very suitable fireworks in the markets as we celebrate our Independence. Be safe we will be back Tuesday…enjoy your long weekend. We feel oil could have another 3-4% downside at the most before we get a bounce higher. As we voiced in recent posts we expect the $70 level to act as solid support in August. If next weeks trade finds buyers we should have some bullish plays in September or October futures and options. Inside day in natural gas wiped out most of the previous days gains. Aggressive trades could have used today’s setback to buy as we will stay long with clients as long as $4.50 supports in August. Our featured play is call spreads in October with clients. From here we expect indices to bounce; we view this as a tradable bottom but nothing more. On a bounce to 1060-1070 in the S&P we will be shopping bearish plays for clients. October sugar was higher by 2.58% today’s closing at a six week high. On a run above 17 cents we see resistance at 17.45 followed by 18.35. If lucky enough to see that we advised clients to exit ALL remaining longs. On a settlement below 16 cents early next week our upside objectives would need to be reduced. December cotton closed lower all five sessions this week; our 74 cent objective is getting closer. Aggressive traders that are ok trading illiquid markets could lightly buy November lumber as an interim low is likely in. Though volumes were light yesterday could prove to be an interim top in Treasuries; on confirmation next week clients will be looking at NOB spreads (short 30-yr bonds/long 10-yr notes). Continue to accumulate longs in December live cattle. It was encouraging today in the metals to see little down side follow thru. Gold was slightly higher but unable to close above the 50 day MA. We will let the dust settle before making any calls. Trade lower was rejected in silver with prices closing just above the 100 day MA; in September at $17.83. We suggest buying silver as prices have come down 7.5% this week. Use set backs in corn, wheat and soybeans to be a buyer as we think the lows are in. Our favorite remains corn as we suggested clients to buy December next week on any retracement. As for currencies we have three ideas, long the Loonie, short the Yen and short the Swissie. For specifics do not hesitate to contact us.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

Our website is filled with resources to help the most novice or savviest trader. Come look at what the markets are doing in our charts & quotes section, or look up contract symbols and more in our tools section. The education segment includes a glossary and ourspecial reports sector has access to all our archived commentaries and specialty articles published by Matthew Bradbard.

Trailing Stop: Stock and Gold

Paul Tracy — Thu, 01 Jul 2010 02:29:00 +0000

A trailing stop order is a a kind of order that helps you limit the potential for loss due to drastic stock price fluctuations. This also helps investors get away from random emotion-based strategies. Research has shown that more disciplined trading is much less fraught with severe losses. One reason why using trailing stop is beneficial is that it does not permit your profits plunge below your set bottom-line. If you have chosen to invest in gold – one of the most reliable assets – you can rely on stop orders just as well.

Still wondering how it works? Very simple. For example, you are about to place an order to buy stock at $20 per share and you have set your trailing stop order at $2. Should stock price soar to $25, the stop order will follow it and will amount to $23. In a case whereby stock price drops to the stop level, the shares will be sold at the best available price. Once the stop point has reached a higher level following price growth, there is no turning back for it. Therefore, this is one of the most investor-oriented trading strategies. Should stock price drop below the stop order, you can withdraw immediately. An opportunity to avoid severe losses is the biggest advantage of the practice. You can limit your losses, but there is a much greater potential for gains.

Today, with world stock markets showing high volatility levels, many traders resort to investing in gold. However, stop orders have proven effective in saving incomes, so investing in shares does not involve serious risks either, which is very important in times of economic instability.

Another benefit is that it is a kind of cure against greed and fear, which often play against investors. No doubt, sketching your own plan means a lot in terms of creative thinking so crucial for successful trading; at the same time, not everyone has self-control. Many investors tend to get too excited to even stick to their own plans and begin to move frantically from one strategy to another. Trailing stop saves you the hard time and anxiety and guarantees stability. However, you’d better take your time and find a reliable stock and set the point at the right moment.

There are two most common ways of setting stop points. First, you can wait for the breakout of a prolonged consolidation (about a month or so) and put your stop points below the lower end of this consolidation. This method is used when there is a possibility of overvaluation; should the stock jump, investors will enjoy substantial income. The stop order is regulated continually along with stock price (or maybe gold price!) momentum; therefore, this technique is referred to as momentum-based or stop loss order technique.

The so called parabolic (stop and reverse) method is less likely to inflict the euphoria of a rapid increase in income. However, it is more preferred by discipline-oriented investors. What’s good about this method is an opportunity to immediately take up the opposite side of the market and go short, should the market momentum take the reverse direction.

Jobs # and then what… 7/1/10

Matthew Bradbard — Thu, 01 Jul 2010 01:38:38 +0000

What excuse will be given for a disappointing number tomorrow? Heading into a long weekend tomorrow’s jobs number will likely have a greater impact than normal. Crude oil has fulfilled our short term targets having dropped 8% in the last four sessions. We are not advocating longs yet but would suggest those short to trail stops down. The only way I would change my mind is if stock indices continue to falter. We do not expect August to close below $69/70. Natural gas was higher by 4.50% with some help from a smaller injection in today’s AGA report. We suggest long exposure in October via futures and option spreads as long as yesterday’s lows hold. With some help from Mother Nature via hurricanes and warmer temperatures we could see a trade above the June highs. Yes…we left our clients short ES position too early and lefty money on the table. Most of my followers realize by now we do not look for home runs and only look to get consistently on base. We believe equities have over shot to the downside and expect a bounce and will look to re-establish shorts for clients. At this time we are thinking a seller near 1070 and a target once short of 950 in the S&P. Impressive close in October sugar trading 1.37% higher on the day. Use a trade closer to 17 cents to exit remaining longs. Another down day in cotton but prices pared their losses. Trail down stops because if indices bounce we could see a temporary bounce in cotton. We still like having clients short December but maybe taking partial profits after the 4.5% depreciation in recent weeks. Did any listen and get long lumber…limit up today and an interim bottom likely is in. We will be exploring bearish plays in Treasuries again for clients in 10-yr notes and 30-yr bonds. At this point yields may be too low and prices too high. We advised clients to exit their short October lean hogs at a small profit expecting to sell again from higher ground. Continue to use the sideways action in live cattle to buy December. The 20 day MA gave way in August gold today and sellers overpowered the market with gold down nearly $50/ounce. Prices are below the 50 day MA for the first time since late March. We feel prices could drop another $25 -40 before we see buyers re-emerge. Silver prices were lower by nearly 5% trading back to the 100 day MA; a level that has held since mid-March. Some futures traders should have been stopped out when prices violated the 20 and 50 day MA’s. Though prices could come down another $1 we used today’s set back to buy some December call spreads for clients. In our opinion nothing has changed in metals, the breakdown today was likely caused by investors liquidating to cover margins elsewhere. Corn, wheat and soybeans were all higher today which is remarkable considered the weakness form outside markets. We continue to like bullish plays in corn and would advise investors to work long on setbacks. The US dollar got crushed today by 1.75% erasing the previous month’s gains. If this continues expect strength from all the European currencies. As for the three commodity currencies we would hold off either direction until next week. Aggressive traders who agree we could get a bounce in indices could look for bearish plays in the Yen.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

Month end…Q2 over 6/30/10

Matthew Bradbard — Wed, 30 Jun 2010 01:03:25 +0000

I am torn on oil therefore have no positions on for clients. In the August contract we violated the trend line that has held since mid-May but quickly rallied back to close slightly lower in today’s session. We’ve seen a 50% Fibonacci retracement at today’s lows but have a sneaking suspicion we could see a probe at $73 before we resume moving higher. We’re suggesting scaling into longs in October natural gas; either futures or options depending on your risk tolerance. We like 50 cent call spreads in October thinking $6 is a reasonable target by then. Ugly last hour in equities; we‘re still looking for a rally to sell for clients. Maybe a fixed jobs number on Friday will get us the bounce we’re looking for. I expect to see 950 in the S&P by fall but we’re more comfortable selling near 1070 than current levels; 1025. A trade back near 2850 in September cocoa we would exit cocoa shorts and start looking to reverse. Sugar was impressive today gaining 5% closing back over the 9 day MA. One of the floor traders I execute orders with said 20 cents today; boy I hope he’s right. On a trade closer to 17 cents we would likely start working out of the remainder of clients longs. December cotton lost 2.24% today closing at a three week low. Trail down stops to protect profits. A 50% Fibonacci retracement would drag December to 74.25. The sideways consolidation in live cattle in our opinion is the market taking a breath before the next leg up. Use this period to scale into longs. Stay in your lean hog puts; we’re looking for a trade under 74 cents in October. Same old tune gold held the 20 day MA again! Clients are on the sidelines as we think you can flip a coin in gold presently. Clients remain long silver waiting for a confirmation of where from here. Within the next week we expect a $1-1.50 move one way. Being most of our clients are long we hope up. Can you say LIMIT UP in corn? Corn was higher by 8.85% today and we feel this is just the beginning. Look to lift hedges or add to longs on back and fill action into next week. The report was mildly bearish soybeans so expect lower trade; clients will look for long entries from lower levels…stay tuned. The Pound should move down; clients were a day early yesterday. We will be looking to re-establish shorts for clients in the coming sessions. We suggest waiting till next week on other crosses.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

What consumer confidence? 6/29/10

Matthew Bradbard — Tue, 29 Jun 2010 02:00:23 +0000

If investors are not interested/confident I am a seller. When August Crude took out $77.70; the 9 day MA mentioned yesterday buyers disappeared and as of this post prices are below the 20 day MA down 3.40% on the day. The path of least resistance is down and this leg could drag prices back to $73/barrel. We see light support at $75; last weeks low but we expect it to give way. We will look to get clients long from lower levels. Natural gas is down by nearly 4% having completed a 61.8% Fibonacci retracement. Aggressive traders are advised to scale into October futures while we prefer October 50 cent call spreads anticipating $6/BTU months down the road. ALL our short objectives were realized in the indices today. We would advise booking profits on all shorts or at least to trail down your stops. From here we would like to see a bounce to get clients short again. Just to be clear most of our clients were out ahead of the G-20 so they did not realize the last 40 points in the S&P. 1070-1080 we may get clients short again. A rising dollar most likely leads to lower cocoa; prices got hit for 5% today. For those still hanging onto longs in Oct0ber sugar on a trade above 16 cents we would exit remaining longs. Cotton traded lower for the third consecutive session; with out a bullish surprise in tomorrows USDA continue to be bearish in December cotton. Coffee looks like we may get a correction lower; our clients will be absent being we see better risk/reward elsewhere. After a 30% appreciation in the last two weeks that should be expected. Treasuries trade to 14 month highs today, as long as indices tumble this will persists but we think this trade is in its final chapters. Live cattle were marginally lower today; we would use a mild set back as a buying opportunity in December. Lean hogs were lower by 1.40% today trading to 2 week lows. Continue to trail down your stops. On a trade closer to 73 in October clients will be looking for an exit door. Gold barely eked out a profit today but the key is prices in August managed to stay above the 20 day MA. Longs in gold are braver than I am but as long as $1235 holds the trend is your friend. The 20 day and 50 day MA’s in silver are serving as solid support; most not already involved in silver were buyers of $3 call spreads in December today. Copper was lower by 5% today closing back under the 200 day MA. If yesterday serves as an interim top this should not be ignored. Buyers were absent in grains today as investors likely lightened up into tomorrow’s USDA report. Our clients are holding long positions in September options and December futures into tomorrows report. Some clients less bullish than I have chosen to spread off their December longs in corn with September shorts. Expect fireworks tomorrow on the open in agriculture. Acreage est. comes in at corn 4.598 mln, wheat 53.825 mln, soybeans 78.183 mln. Stocks est. comes in at corn 4.598 bln, wheat 0.940 bln, soybeans 0.594 bln. The commodity currencies continue to be in sell rallies mode though clients missed today looking to be a seller from higher levels. The only action today was scalping in the Pound as we maintain prices have gotten ahead of themselves and see 1.4700 very soon. Be cognizant that the dollar may run into considerable resistance at the 20 day MA; 87.00 in the September contract.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

G-20 provides NO clear direction

Matthew Bradbard — Mon, 28 Jun 2010 20:36:17 +0000

Though Crude held the 9 day MA we did not like the price action. Those long could stay long but we suggest trailing stops as a settlement below $77.70 on the August contract signals a break lower. We advised our clients who were long to exit at a small profit and move to the sidelines. Additionally we do not like having too much exposure in any one sector and we started buying natural gas for most of our clients that trade energies. Today they were buyers of October 50 cent call spreads. We expect within that time frame to see a trade to $6 BTU. Inside day in indices though we still expect a trade above the 2o day MA in coming sessions. In a perfect world we get a trade closer to 1100 in the September S&P to re-establish shorts for clients. October sugar posted a bearish engulfing candle today closing 5% off its intra-day high. We suggest using rallies to exit any remaining longs. We would again be operating under the premise October is a buy below 15 cents and a sale above 16 cents. We continue to like bearish futures and options exposure in December cotton. Aggressive traders can start scaling into September lumber as long as the recent lows hold. Treasuries hit a new contract high today; some clients will be playing defense looking for a retracement to cut losses on their remaining August bond puts. While we think there is more upside in live cattle we trimmed some of our clients longs in live cattle to get them short lean hogs. We feel we could be in and out of their hogs before we see much movement in the cattle trade. Those not willing to move we still are bullish live cattle but it may take some time to develop. Live cattle were marginally higher today as lean hogs were lower by 1.47-2.23% depending on the month. As we said last week aggressive traders should be short August and trailing stops to protect their profit. Today some clients established bearish plays in October expecting a trade below 73 cents. Gold’s $28 trading range has me thinking a correction is due but until the trend line and 20 day MA give way we must respect the trend; that level is $1235-37 in August. Clients have NO exposure. September silver failed to follow thru after making a new high closing down 1.81%. Traders that are long futures we recommend trailing stops. Our featured options play for those bullish silver is December $20/25 1:4 call spreads. Mixed bag in grains with corn and wheat down and soybeans higher on the day. We advised clients to pull their orders on the CBOT/KCBOT wheat spread until the USDA report Wednesday. Aggressive traders could buy December soy meal with stops below$257. We continue to scale into longs in September corn options and December futures for clients. While all traders know past performance is not indicative of future results the last two occasions corn was at these levels buying emerged. Aggressive traders can use the 0.50% rally in the Pound to fade with tight stops as we think prices have gotten ahead of themselves.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

The Technical Traders View on Gold, SPX and Financial

Chris Vermeulen — Mon, 28 Jun 2010 02:51:57 +0000

It was a non stop sell off last week in equities as the SP500 sold down 4 days straight with a small move up on Friday. While investors were cashing out of stocks, we saw that money move into the big shiny yellow safe haven – Gold.

I have put together a short video showing you how I see the market and what I think is likely to happen this week for gold, stocks and financials. But here are my Cole’s Notes version incase you cannot view the video.

Gold:
- Long term trend is up and I am currently long gold but feel a sharp correction could happen any day.
- Price/Volume action on gold is bearish short term
- We took some money off the table on Friday into the strength
- I am protecting my long position using a stop around the $1240 area
- I still like gold and hope it rallies, but if it turns around I will be in cash until the correction is over.

SP500:
- SP500 is currently oversold after its 4 day sell off
- This index is trading deep into a support level
- Financial sector and GS (Goldman Sachs) tend to lead the market and they performed well on Friday.
- I feel the SP500 index is due for a solid 2-3% bounce and possibly a 4-6% rally

Watch My Video For More Detailed Analysis and Price Levels

Can see the video above? click here – http://www.thegoldandoilguy.com/articles/sunday-june-27th-gold-spx-video/

If you would like to get my detailed trading analysis and trading signals please visit my website: www.TheGoldAndOilGuy.com

Chris Vermeulen

Start Looking At This One

Pierce Points — Mon, 28 Jun 2010 01:50:14 +0000

Coal. Specifically, any coal that can be easily shipped to Asia.

Despite all of today’s carbon concerns, the world still largely runs on coal. In fact, according to BP’s recently-released annual energy review, coal’s share of global energy use increased in 2009. In fact, the percentage of global energy demand met by coal was the highest since 1970!

Coal is critical to energy supply in many countries. And that is leading those countries to mess with the market.

India is perhaps the best example. The government sets prices for domestically-produced coal. The only problem is, they set those prices so low that most of India’s miners are having trouble turning profits.

The result being that Indian coal mining expansion has been slow. Leading to acute shortages. Today, 31 of the 81 power plants monitored by India’s Central Electricity Authority are at “critical” coal supply levels, holding less than seven days’ worth of stockpiles.

In fact, 16 of those plants are running on less than four days’ supply. That’s 20% of the nation’s power teetering on the edge of shutdown if there’s a supply disruption.

Coal price-fixing has been a disaster for supply. And yet the government seems very reluctant to raise domestic prices. In fact, this March the government went the other way, levying a “clean energy” tax on domestic coal producers. This is only going to raise production costs, squeezing coal companies’ margins even more.

The chosen solution is imports. Companies bringing foreign coal into India will be allowed to charge higher prices.

This means importing is going to be a good business for someone. And coal projects that have the potential to ship to India are going to be sought after.

Now it appears that China may be going a similar route. This week, the Chinese government announced prices freezes on all coal sales in the country.

Chinese coal sellers had been moving toward flexible monthly prices. And such prices had been escalating of late.

But now the government will force sellers to stick to previously agreed-upon yearly pricing. The move is apparently aimed at containing Chinese inflation.

This is a big negative for Chinese coal producers, many of whom have relatively high production costs. It will likely put a crimp on local supply. Potentially leading to a situation similar to India, where imports become a stop-gap.

Got a coal project in Indonesia, Vietnam or Madagascar? The value might be climbing as we speak.

Here’s to assured supply,

Dave Forest
dforest@piercepoints.com

Note:

The Utica Revisited Richard (Rick) Mills

Rick Mills — Sun, 27 Jun 2010 18:06:48 +0000

As a general rule, the most successful man in life is the man who has the best information

It was August of 2009 when I first wrote about Quebec, Canada’s Utica shale gas play.

The Utica has a lot going for it:

Shallow depth of the shale

Proven fracturability

High production rates, up to 1 million cubic feet a day (mmcf/d) in vertical tests

Rock properties are comparable to other more established shale plays, right mineralogy, porosity and maturity

High-quality natural gas with minimal impurities, 88% to 97% methane, less than one per cent inert gases and 1,027-1,136 British Thermal Unit (Btu) content. Gas is pipeline ready, no H2S, no CO2, no nitrogen extraction

Infrastructure in place with nearby access to major pipelines

Premium natural gas pricing to NYMEX helps make the economics compelling. New York City Gate pricing typically averages US$1 above NYMEX Henry Hub, making the pricing environment attractive for producers

Low initial acreage costs with low carrying costs

Quebec Canada is one of the best areas in the world to explore for and develop a resource

Utica gas is within 400 miles of the New York City Market. Unused export capacity to the US on TransCanada Corp’s pipeline system is 200 – 400 mmcf a day.

Quebec uses 500 billion cubic feet per year of natural gas – all of it coming from Alberta, whose conventional reserves, according to industry consultant Ziff Energy Group, are in steep decline. Ziff predicts that total gas output in the Western Canada Sedimentary Basin will drop below 14 Bcf/d by 2020 from the current 16.2 Bcf/d.

The National Energy Board (NEB) estimates deliverability of Canadian gas will shrink by 9% a year over the next two years, this despite:

An increase in gas drilling investment from C$5.76 billion in 2009 to C$8.51 billion in 2011

An increase in gas-targeted wells from 4,170 to 6,495

Royal Dutch Shell stepped up its interest in U.S. gas shale properties with a $4.7 billion purchase of privately-held East Resources, Inc. The deal includes a 650,000 net acreage position in the Marcellus shale, and 1.05 million net acres overall. Shell also acquired 250,000 net acres of mineral rights in the Eagle Ford shale play in South Texas. This brings Shells total shale and tight gas acreage acquired just this year in North America to 1.3 million acres.

Total SA, Europe’s third-largest oil company, accelerated its expansion in unconventional energy by agreeing to buy a stake in Chesapeake Energy Corp.’s assets in the biggest U.S. natural-gas field for up to US$2.25 billion.

Exxon Mobil Corp., the biggest U.S. oil company, is buying shale-gas producer XTO Energy Inc. for $29.2 billion.

“This is really about value creation over the next many years. This is about the next 10, 20, 30 years.” ExxonMobil CEO Rex Tillerson

“We will need a growing amount of electricity and natural gas is in an excellent position to capture a significant amount of that market.” Larry Nichols, chairman of Devon Energy and chairman of the American Petroleum Institute

A Canaccord Adams equity research report said the participation of Talisman Energy and Forest Oil in the Utica shale of the St. Lawrence Lowlands improves the plays chances of becoming commercial in the next few years.

Netherland, Sewell & Associates, a Texas-based consulting firm, estimated the Utica deposit could hold 150 Bcf per square mile, 66% more than any previous calculation.

The feature company in my first Utica article “The Utica – An Emerging Canadian Shale Gas Play” was Canadian Quantum Energy Corp. CQM – TSXv.

CQM has interests in four key permits comprising approximately 170,000 gross acres / 35,000 net acres in the heart of the identified Utica’s Fairway. At the time I featured the Company, its shares were trading around the C$1.90 level, this was just prior to the Company implementing a four for one forward split of its shares. Post split the shares dropped briefly to the C$0.40 level and then climbed to a high of C$2.29.

This author believes a large part of CQM’s post split share price increase (currently 29.5mm shares fully diluted >50% owned by insiders), and the increased market attention all the Utica players received, was because of flow results from the St. Edouard well (12 mmcf/d), a joint venture horizontal well drilled by Talisman and Questerre. It’s also my belief, because of 3D seismic and pipeline work currently being done, development wells will be drilled and takeaway production will happen from the St. Edouard well #1 in 2011.

Talisman Energy has drilled, or will drill this summer, four more wells in the Utica Shale in Quebec.

The success of all wells drilled in the area are important but especially important to CQM are (in the above map CQM’s interests are outlined in red):

Leclercville is being stimulated with a multi-stage frac as I write this article

Fortierville is very close to one of CQM’s permits. This well is currently being drilled

Gentilly was drilled in February of 2010 and is scheduled to be fraced as soon as the equipment is released at Leclercville.

Ste-Gertude will be spudded after drilling is complete on Fortierville

Two of the next four wells to be drilled are on ground CQM has an interest in with a third well being very close to the permit boundary, much closer than the St. Edouard. Also of note is Forest Oil has announced plans to drill a 1,000 meter horizontal well in the second half of 2010 on its deeper North Richelieu acreage – closer to CQM’s Nicolet acreage than the St. Edouard.

80% of CQM’s Utica acreage is located on the Nicolet permit with 87% of the total Nicolet land package lying between the Yamaska Growth Fault and the Logan’s Line – this area is deeper & over-pressured and past activity indicates the highest probability of success.

Canadian Quantum and Junex entered into a farm-out agreement whereby Junex earned a 50% working interest in CQM’s Nicolet Utica and Lorraine shale intervals by drilling and subsequently coring two exploration wells (St.Gregoire #2 and St.Gregoire #3)

The St.Gregoire #2 well was drilled into the deeper acreage south of the Yamaska growth fault encountering over-pressured zones. It is worth noting that the St.Edouard, a horizontal well, was drilled into a similar area of greater structural influence and over-pressuring.

Canadian Quantum and Junex plan on shooting 2D seismic and based on results from this seismic shoot will initiate a horizontal drilling program, likely in early 2011.

The other 20% of CQM’s holdings in the Utica are partnered with Talisman and Questerre Energy where CQM has a 3.75% working interest. This interest, while small, is extremely important to the Company as it gives them access to Talisman – the most active and most experienced shale player in the region.

That small working interest is going to, in this authors opinion, drastically shorten the learning curve for CQM when/if it comes time to develop the Nicolet. CQM is learning as much as they can from the progression of these early wells – figuring out a successful formula and how to keep costs down.

An NI 51-101 compliant resource study was recently conducted covering the Nicolet Permit by Netherland, Sewell & Associates (NS&A). The report concluded 8.7 tcf of original gas is in place on the permit of which 10% could be recovered. Net to CQM this equates to 436 bcf of recoverable reserves on this permit alone.

With significant news flow expected through the rest of 2010 the Utica could again become one of the hottest resource plays in North America.

CQM is currently trading around C$1.00, has recently closed a C$2.09mm financing, is fully capitalized to meet its 2010 capital expenditure program, has a significant land base with third party resource calculations and, possibly, numerous positive share price catalysts coming in the short to medium term.

The Utica Shale gas play in Quebec, Canada and Canadian Quantum Energy Corp. TSXv – CQM should be on every investors radar screen.

Is it on yours?

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in the junior resource market and would like to learn more please come and visit us at aheadoftheherd.com

***

Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard Mills does not own shares in any company mentioned in this article.
Canadian Quantum is an advertiser on aheadoftheherd.com