HOUSTON: Exactly one year after crude eclipsed $100 a barrel for the first time, 2009 trading began Friday with prices roughly half their year-ago levels, and some believe oil could be headed even lower.

Oil markets kicked off the new year with crude climbing above $46 a barrel.

A variety of factors were likely at work, including continued violence in Gaza and expectations that OPEC would carry out its largest production cut ever to stem historic price declines.

Oil market activity was also light as many traders took a long holiday weekend, and that can lead to price swings.

"I have a feeling, more than anything, it's the thin trading conditions pushing the price higher,'' said Peter Beutel of energy consultancy Cameron Hanover.

Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.

In London, February Brent crude rose $1.32 to settle at $46.91 a barrel on the ICE Futures exchange.

Oil's surge into triple digits for the first time one year ago was the start of a climb that would peak above $147 a barrel by July.

Since then, amid fears of a prolonged global recession and crumbling worldwide demand, crude prices have plunged more than 70 percent.

"Thank goodness that's over!'' Raymond James & Associates said in a note to clients Friday, summing up what many traders feel after the most volatile year since crude futures were first offered on Nymex in 1983.

The same gloomy economic data that drove prices into the mid-$30s in the final month of the year continued into 2009.

A private group's measure of manufacturing activity fell more than expected in December, hitting the lowest reading in 28 years as new orders and employment continue to decline.

The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November.

Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.

Any reading above 50 signals growth, while a reading below 50 indicates contraction.

The index has fallen steadily for the last five months.

A weakened manufacturing sector suggests demand for energy will not rebound any time soon.

Activity in the U.S. oilfield already reflects expectations for anemic demand. Baker Hughes Inc. reported Friday the number of rigs actively exploring for oil and natural gas in the United States fell by 98 last week to 1,623.

That's nearly 16 percent fewer rigs at work than when oil prices peaked in July, and 9 percent below the year-ago figure.

The February contract for crude rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine.

Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.

As of late Friday afternoon, no interruptions outside Ukraine were reported. Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.

"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices,'' Jakob said.

The European Union depends on Russia for about a quarter of its gas, with about 80 percent of that delivered through pipelines controlled by Ukraine.

Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months.

Analysts say crude's direction in the early part of 2009 will be linked largely to whether the cartel adheres to the new quotas.

In other Nymex trading, gasoline futures rose 4.85 cents to $1.11 a gallon.

Heating oil rose 3.8 cents to settle at $1.48 a gallon, while natural gas for February delivery jumped 24.9 cents to $5.971 per 1,000 cubic feet.

WASHINGTON: President-elect Barack Obama's transition team is putting the finishing touches on an economic recovery plan that could run from US$675 billion to US$775 billion.

Briefings for top congressional Democratic officials are likely this weekend or on Monday, a senior transition official said Friday.

Obama is slated to meet Monday with House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid in a Democratic strategy session likely to focus on the economic recovery package.

Democrats had hoped to get the recovery plan set for Obama's signature as close to Inauguration Day as possible, but it is plain that the schedule is slipping.

When Congress convenes next week there will only be two weeks before the inauguration. The earliest the measure could reach the House floor is the week of Jan. 12, said a Pelosi spokesman, and even that is looking doubtful.

Republican leaders have demanded time to scrutinize the measure, a request that seems likely to be granted, at least in part.

A separate Obama transition official promised "full transparency'' in considering the plan.

The Senate's top Republican, Mitch McConnell, again protested Friday that his party and the public need time to scrutinize the Obama plan so that "every dollar needs to be spent wisely and not wasted in the rush to get it spent.''

Congressional aides briefed on the measure say it's likely to blend tax cuts of $500 to $1,000 for middle-class individuals and couples with about $200 billion to help revenue-starved states with their Medicaid programs and other operating costs.

A large portion of the measure will go toward infrastructure projects, blending old-fashioned brick and mortar programs like road and bridge repairs and water projects with new programs such as research and development on energy efficiency and an expensive rebuilding of the information technology system for health care.

Despite the proposal's big price tag, a top lawmaker questioned whether the economic situation is so dire that Congress may not be able to pump money into the economy fast enough.

"My main worry is whether or not we can find enough places to responsibly put money so that you have a big enough effect to correct the problem or at least mitigate the problem,'' said House Appropriations Committee Chairman David Obey.

Obey said the focus is on getting taxpayer dollars into programs that can spend it quickly such as aid to states suffering massive budget gaps.

He declined to go into other specifics but said the measure won't lead to many permanent spending hikes.

"We are trying to focus on what can get out the fastest that will not be built into the budget baseline when the recession is over,'' Obey said.

KUALA LUMPUR: Malaysian institutional funds should take the opportunity to diversify their portfolios now as they are insulated to a certain extent from events in global markets, according to global financial consulting firm Watson Wyatt.

Its Asean practice leader for investment consulting Puah Ser Sze said a few things could happen with local funds under current extreme global market conditions, especially since their investments were mainly domestic.

“I hope funds will go with the first route by introducing diversity into their portfolio. This is what we have been encouraging our clients to do,” she said in a statement.

Puah Ser Sze

Watson Wyatt’s global practice director for investment consulting Carl Hess said good invesment managers should already be taking advantage of undervalued securities with prices that had been depressed through panicked selling.

“We are likely to see buying opportunities for funds that can identify them and move quickly enough to take advantage of them,” he said.

“One action they really should take now is to assess whether they or their delegates are well placed to seize that advantage,” he added.

The firm’s head of investment consulting for Europe Paul Trickett said funds should bear in mind that the best buying opportunities typically arise before economic stabilisation and recovery are clear.

He said pension funds should not react to short-term poor relative performance from high-quality managers.

“Historically, it’s often after such performances that these managers produce stronger returns,” Trickett said.

“We would also caution against reactionary like-for-like manager changes, because of recent significant increases in transition costs,” he said.

According to Trickett, it would be prudent to wait for some of the present uncertainty around shorting rules and costs to be resolved before investing new capital in funds with long lockups. – Bernama

BEIJING: As China's long-awaited shift to a new fuel pricing regime took effect yesterday, the biggest question of all remained unanswered - will Beijing really allow pump prices to move with the market?

For the moment the question is moot. Crude oil prices have stabilised on either side of US$40 (US$1 = RM3.46) a barrel since China cut petroleum prices by 14 per cent and diesel by 18 per cent two weeks ago, knocking them roughly into line with global rates.

But further crude oil losses or a rally back to US$50 will put China's policy to the test.

Even after a month of debate, analysts say they're not much clearer on how often China's motorists could see price increases, or how stable profits will be for oil refiners Sinopec and PetroChina.

Those are key questions for a world oil market that will be looking closely for any signs that demand growth is slowing even further in the world's second-largest oil consumer, whose policy of subsidising fuel prices had sharpened its motorists' demand.

"The effectiveness of fuel pricing will only show up when oil prices change," said Yang Fuqiang, former vice president of US Energy Foundation, an energy consultancy.

"The reform package is a small step forward and may prove to be only transitional."

The core of the scheme is clear enough: a sharp rise in consumption taxes will replace road tolls and other charges in an effort to better match the cost of fuel with its use; a revised pricing scheme with a hard cap on retail rates should guarantee a lower but stable profit for refiners.

But hopes that China might fully liberate prices - allowing them to be set by the market or by a transparent, market-based mechanism - were dashed, suggesting policymakers remain skittish about the idea of a liberalised market despite promising for years to encourage energy efficiency and deter wasteful use.

In announcing the overhaul two weeks ago, Beijing said it would change the ceiling price "when changes in international oil prices exceed a certain level for a certain period of time". The government did not disclose either the level or the period.

The National Development and Reform Commission (NDRC), which sets energy policy and fuel prices, said that from January 1 it would follow a formula based on crude prices, processing costs, taxes and reasonable profits.

The formula is similar to one it established in 2006 - and subsequently almost completely ignored.

As oil rallied to a succession of record highs since 2003 China's fuel prices rarely budged, with policymakers anxious to avoid stoking inflation or stirring social unrest.

Such ambiguities have left the market wondering what the government's plan really is, whether it would be seriously implemented this time, and how it would help avoid the kind of shortages that have hurt the economy and consumers in years past, when refiners facing crippling losses cut back sales.

"Observations are best made when oil prices rally," said Qiu Xiaofeng, an oil analyst with China Merchants Securities.

"We do not know every detail including the level and period of crude price changes that the government's decision are based on, nor do we know the frequency of fuel price adjustment that might have been determined."

"Let's wait and see how things go to and find a clue to how the reform is implemented," Qiu said.

For now, motorists are seeing some benefits of lower prices and the competition that comes with them. - Reuters

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Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz says its surveillance indicates that Malaysian banks are not tightening credit

LENDING by local banks remained strong last year, but lenders have been told to balance the need to be careful with loans with continued support of viable businesses, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said.

"There has been a growth in lending of 8-10 per cent across the board; household, small- and medium-sized businesses and outstanding loans have increased," Zeti said in an interview with Business Times.

The industry has the capacity to provide access to lending because domestic banks have experienced high profits for an extended period of time, are well capitalised and have less bad loans.

The global financial crisis spooked lenders initially, but Bank Negara has told them not to overreact.

"We have worked very hard to put in place appropriate governance, risk management practices, so banks must conduct prudent lending and also extend assistance to those viable businesses which experience difficulty due to the current environment."

On reports that banks were tightening credit, Zeti said its surveillance indicated that it was not so.

Many banks have put in place arrangements to restructure loans and provide advisory services to their clients.

Bank Negara expects prices to continue falling in the first half of this year and the Consumer Price Index, the barometer of inflation, to decline to three per cent.

Malaysian banks also have enough money, as reflected in the interbank market where banks go to borrow money. They are net lenders, meaning they lend more than they borrow.

This also means that it is unlikely for the central bank to provide funding to local lenders, which is now the norm in the West.

"We have absorbed liquidity during 2007 and early part of 2008 and have outstanding amounts of almost RM150 billion that we can unwind and provide to the system.

"And we have in place a robust liquidity management framework that provides access to liquidity not only to the banking sector but also insurance companies - for both normal and stressed conditions."

Zeti also pointed out that the financial system in Malaysia differed from others, especially in the mobilisation of deposits by the banking sector.

The deposit ratio to gross domestic product is 147 per cent, reflecting stable and robust growth, while the loan:deposit ratio is 75 per cent, far exceeding the loans that have been extended.

Deposits also enjoy 8.5 per cent annual growth, reflecting a propensity to save.

Business Times- Rupa Damodaran