Market Report: Chinese oil company sparks interest in BG

According to the latest version of the story, BG could become a target for CNOOC, the Chinese state-owned oil group. It is said to be keen on doing a deal in the West after being forced to abandon its offer to acquire America's Unocal in the face of political opposition. US lawmakers decided the move endangered national security and so blocked it.

City analysts were sceptical that the Chinese group would turn its attention to BG. In their view, CNOOC does not have the firepower to buy the UK group, which is far bigger than Unocal.

Meanwhile, the continued strength in the price of crude strengthened BG and the wider oil sector. BP added 9.5p to 659p, Royal Dutch rose 42p to 1,838p, Dana Petroleum added 41p to 791p and Paladin jumped 18.5p to 293.5p as the value of oil hovered near$64 a barrel. Analysts do not expect oil prices to retreat in any meaningful way any time soon. They point out that Opec's output is at its highest level since 1979 but demand has increased by about 35 per cent in the intervening period.

Cairn Energy, 110p higher at 1,720p, was given an added boost by UBS, which upgraded the stock to "buy" from "neutral" and set a whopping 1,960p price target. According to the Swiss broker, Cairn would be attractive to an acquisitive player looking to expand in India. ENI could be one such predator, UBS hinted.

Back to subject of perennial bid tales, Matalan was pushed 6.5p higher to 204p as traders once again bet that it will not be long before the discount retailer loses its independence. Likewise, O2 was driven 2.75p better to 142p by fresh hopes that the mobile phone group will soon be bought out.

Wimpey ticked 0.25p to 408.5p, but at one point during the session its stock traded as low as 397.5p as rumours the group is considering a move on a German construction group, Hochtief, circled the Square Mile.

Wimpey quickly rallied as those who know the construction sector well dismissed such a move by the housebuilder. First, Hochtief is far too big a company for Wimpey to be able to swallow, the argued. Second, it is focused on building office blocks, bridges, roads and airports in Europe, while Wimpey is a simple UK and US housebuilder. "A tie-up between Wimpey and Hochtief would be a major shock. It is just not going to happen," analysts warned.

Gyrus gave up 11.75p to 311.5p as one of the early-stage backers of Acmi, the medical devices company recently bought by Gyrus, sold its stake in the UK group. After Gyrus' purchase of the US group, Fox Paine, a venture capital firm, was left with a 10 per cent holding in the combined company. Yesterday, Numis Securities placed this with various institutional investors at 302p. Gyrus' tie-up with Acmi doubled its size and the company is now expected to join the FTSE 250 at next month's review of the index.

Elsewhere, Virgin Mobile dropped 9p to 259p on news that its three most senior directors had sold a significant chunk of their shares in the mobile phone operator. Tom Alexander, the chief executive, Alan Gow, the finance director, and the commercial director Joe Steel sold 3 million shares in total, thereby more than halving their equity exposure to the telecoms company. The directors are clearly taking advantage of the strong performance by Virgin Mobile shares of late. They have soared 32 per cent over the past three months. However, the company's underlying performance has been far from great. Its first-quarter results disappointed some in the City and Investec Securities now advises its clients to "top-slice" their holdings.

Paragon gave up 11p to 490p after Bridgewell Securities cut its rating on the buy-to-let lender to "neutral" from "overweight". Paragon shares have recently been boosted by talk of a possible bid for the company and although the broker admitted that the group is an attractive acquisition target, it expressed scepticism that a deal is imminent.

Bridgewell said: "We suspect that any potential bidder will be unwilling to make acquisitions at the present point in the cycle." In the absence of an offer, the broker sees Paragon shares as an unexciting prospect and urged its clients to switch into its rival Kensington, which gained a penny to 667p.

Finally, the Irish pharmaceuticals group Elan gained €1.3 to €7.4 as the latest trial data of its all-important Tysabri drug for multiple sclerosis raised hopes that the treatment will soon be able to return to the market.