Reminder of New Rate Framework to replace BLR

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BANK Negara is moving ahead with the times by replacing the outdated base lending rate (BLR) with a more relevant interest rate benchmark. Bank Negara Malaysia will replace the Base Lending Rate with the Base Rate from Jan 2, 2015 as the main reference rate for new retail floating rates. While banks in Malaysia are moving away from the base lending rate (BLR) system from January next year, customers with existing loans or applying for new ones won’t be affected. Once the new reference rate is implemented, both new and existing borrowers can expect to easily compare a more transparent pricing mechanism between financial institutions for better informed decision-making. In this transparent scenario, banks will have to add more value to loan packages to attract customers, with the latter benefiting the most.

This was confirmed by a Bank Negara Malaysia (BNM) representative today, who explained that the change is to perception on how the bank interest is charged. For example, while many banks today may tout mortgage offers to be at “BLR-2%”, this will later change to the new base rate plus the margin set by the bank.

To illustrate, if the BLR is now at 6%, the “BLR-2%” offer means the customer pays 4% on the mortgage. With the new system, the bank will have to reveal its base rate – say 3% – and also disclose that its margin is 1%. Ultimately, while the new interest is presented as “base rate + 1%”, the effective rate paid charged on the customer’s mortgage remains the same at 4%. The major difference is that this new rate will be determined by different factors, which includes banks’ cost of funds, their Statutory Reserve Requirement (SRR) account balances (how much they have in their reserve accounts with BNM proportionate to their eligible liabilities), borrower credit risk, liquidity risk premium and operating costs and profit margin. 

Better transparency always spells good news for consumers. It is also good for the banks as it creates healthy competition and provides wider options for loan applicants. Bigger establishments will have more room to maneuver when determining the reference rates, whereas smaller institutions may not have as much leeway to offer attractive rates. This is due to the usually lower cost of funding for bigger institutions via current and savings accounts (CASA) and Fixed Deposit accounts.

The new reference rate framework proposed by Bank Negara to replace the base lending rate (BLR) will spur stiff competition in the banking industry, AmBank Group chairman Tan Sri Azman Hashim said.

“Competition will get stiffer, as customers will be exposed to more transparent pricing,” he told a media briefing after handing over a multi-purpose vehicle to the Malaysian Islamic Women’s Welfare Council as the diversified banking group’s contribution.

The new interest rate framework allows banks to vary the floating lending rates in tune with fluctuations in funding costs, reflects changes in monetary policy and acts as the basis for the pricing of retail loans, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz. She also said that the average lending rate applied by banks currently did not reflect funding costs and was substantially lower than the BLR.

“It reflects other costs, overhead costs and others. So the new framework will be more related to the funding cost, especially the marginal funding cost, which is actually how banks are pricing their loans,” she said.

For loans prior to 2015, the BLR will still be the reference point but should financial institutions make any change to the Base Rate; the same will be made to the BLR to reflect this. BNM states that the shift to the new Reference Rate should have no impact on the effective landing rates charged to retail borrowers which are determined by various factors and that this does not represent a change in the Bank's monetary policy stance. 

Amidst the uncertainties on the rates, home buyers should always be a step ahead by comparing all the rates from banks before making a decision on which loan to apply for. For those who fear higher rates after the implementation of the new rate, you can safe guard your low rates now by switching or getting a fixed rate loan. Doing so can also remove some of the intimidation factor from the home buying process.

Palm oil price surges as flood hits supply

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Palm oil and rubber advanced as flooding in Malaysia and Thailand disrupted supplies from Southeast Asia, and forecasters said that further heavy rain over the next few days will probably exacerbate the situation. Palm oil climbed for a ninth day to head for the longest run of gains in more than a decade as flooding in Malaysia hurt prospects for harvesting, compounding a seasonal slowdown in production in the largest grower after Indonesia.

The contract for March delivery rose as much as 0.8 per cent to RM2,305 a metric tonne on Bursa Malaysia Derivatives and traded at RM2,299 at 11.48am in Kuala Lumpur. A ninth day of rising prices would be the longest run since June 2002, according to data compiled by Bloomberg. Palm oil climbed to 2,308 yesterday, the highest level since November 4.

The heavy rains that flooded parts of Malaysia over the past two weeks will continue for at least another week, risking disruption to the palm oil harvest, Commodity Weather Group forecast yesterday. Malaysia evacuated more than 200,000 people as of yesterday after the worst flooding in decades left at least 10 people dead. The downpours also hurt rubber supplies from Thailand, which borders Malaysia, and boosted prices.

CIMB Research said in a report yesterday that the four worst-hit flooded states of Terengganu, Pahang, Kelantan and Perak accounted for 30% of Malaysia’s palm oil supply in 2013. Its analyst Ivy Ng noted that harvesting, milling and transportation activities as well as operations of related processing facilities in affected estates would be disrupted. She said in her report that crude palm oil output for Dec 2014 could post a larger decline from the previous month but noted that it was too early to assess the impact now.

“This will be dependent on the severity and length of the on-going monsoon. However, we expect this event to lift crude palm oil (CPO) prices in the near term,” Ng said.
Maintaining her “neutral” rating on the sector, she noted that among companies on CIMB Research’s radar, Felda Global Ventures Holdings Bhd (FGV) had the highest exposure to the flood-affected states. Rubber production in Thailand and Malaysia will contract by at least 100,000 tons a month if floods persist, IRCo Chief Executive Officer Yium said in an interview today. The group is the operating arm of the International Tripartite Rubber Council, which represents governments and exporters from Thailand, Indonesia and Malaysia.

"Prices are likely to extend the rally as heavy rain in southern Thailand and northern Malaysia cause floods," the Rubber Research Institute of Thailand said on its website today. Rains have spread to 60 per cent of Thailand's southern provinces, which account for 63 per cent of plantations, it said. 

The Malaysian Palm Oil Association, a group of growers, forecast that crude palm oil production in Malaysia fell 21% in the December 1-20 period compared to a month ago. A group of millers in southern peninsular Malaysia estimated that crude palm oil production between December 1-25 over the states of Johor, Pahang and Melaka plunged 37% from November, according to traders.

AirAsia shares drop sharply After Flight to Singapore Vanishes

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The Kuala Lumpur-traded shares of AirAsia had fallen 7.8 per cent as of 0320 GMT, their biggest one-day drop in more than three years after one of its aircraft went missing on its way to Singapore from the Indonesian city of Surabaya, since September 22, 2011. The stock had dropped as much as 12.9 per cent to RM2.56 (S$0.97) after the opening at 0102 GMT, compared with a 0.4 per cent decline in Kuala Lumpur's benchmark index. The Airbus A320-200 departed the Indonesian city of Surabaya around 5:30 a.m. local time. Air controllers lost contact with the plane at around 6:17 am local time, in what was typically a two hour flight. There were 162 people on board the flight, including seven crew members. The overwhelming bulk of those on board were Indonesian, with a mix of nationalities from South Korea, Singapore and Europe, according to AirAsia. The plane's disappearance became the third missing plane linked to Malaysia this year, and capped a string of commercial air disasters this year.

The stock slid as much as 13 percent to 2.56 ringgit and was 8.2 percent lower at 11:31 a.m. local time. Shares were cut to a trading sell from buy at Hong Leong Investment Bank Bhd., which lowered its price target to 2.64 ringgit from 3.15 ringgit. AirAsia X Bhd. (AAX), the long-haul arm of AirAsia, fell 6.6 percent. The FTSE Bursa Malaysia KLCI Index was little changed. About 59.5 million AirAsia shares had been traded, making it the bourse's most active stock. That was about 5.2 times the stock's average full-day volume over the past 30 days. The biggest tumble in three years came after Indonesia resumed its search for the missing Flight 8501 early on Monday.

The Bangkok-listed shares of Asia Aviation, the holding company for Thai AirAsia in which the AirAsia group holds a 45 percent stake, fell 3.6 percent on Monday. Indonesia AirAsia is 49 percent owned by Malaysia-based budget carrier AirAsia, with local investors holding the rest. The AirAsia group, including affiliates in Thailand, the Philippines and India, has not had a crash since its Malaysian operations began in 2002. Indonesia resumed its search for the missing jetliner QZ8501 at first light on Monday.

Hafriz Hezry, an analyst with AmResearch, expected the stock to recover within a few days after the market's initial reaction to news of the missing airplane.

AirAsia's reputation at the group level may take a hit, affecting its yield recovery next year, he said, but the impact on AirAsia's earnings would be minimal because its share of the Indonesia unit's profit will not be included in its earnings until the unit has reversed unrecognized losses, which could take several quarters.

"The market reaction is quite natural. I am not surprised," Shukor Yusof, founder of aviation research firm Endau Analytics, said, according to Agence France-Presse, adding: "I think investors confidence will return quickly since the airline has a solid business model."

AirAsia Bhd. is primarily a short-haul, low-cost carrier that was founded in 1996 and listed on the main market of the Bursa Malaysia Securities Bhd. in 2004. The company has made a successful business of offering heavily discounted air fares on national and international routes in Asia. According to AirAsia CEO Tony Fernandes, the group has carried 220 million passengers in 13 years, and had no fatalities prior to the disappearance of flight QZ8501.

KL index climbs up while markets in SE Asia fall

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Southeast Asian stock markets were mixed today in holiday-thinned trade, with Malaysian benchmark hitting an over two-week high, while Thai index fell due to weaknesses in energy shares and investors awaited the central bank's economic review. Malaysia's key index ticked up 0.64 per cent at 1,760.92, the highest level since Dec. 10. Supports are anticipated to appear around 1,730-1,740, while resistances may emerge from 1,760-1,800, said broker Affin Hwang Capital.

“The FBMKLCI is anticipated to continue its current rebound till end of year with window dressing activities expected to support the index and selected blue chips,” it said in a report.
It was a roller coaster ride for the stock market this year. The market was bullish in the first half of the year and even climbed to historical highs. However, the market turned bearish in the second half of the year as weaker ringgit and falling crude oil prices weighed down corporate earnings especially in the oil and gas, plantation and banking sectors. Just a week ago, the FBM KLCI fell to its lowest level in 20 months. Not only all the gains made in the first half of this year were wiped out, gains made in year 2013 were also almost wiped out. The FBM KLCI continued its bullish momentum last week and filled in the gap that we have expected and closed at its two-week high.

The market, including global markets, continues to rise for window-dressing towards the end of the year. Prices of commodities did not see much movement in the past one week and the Malaysian ringgit held firm against the US dollar. The FBM KLCI increased 2.8 per cent in a week to 1,764.44 points. However, trading volume was low as most market players may be out for year-end holidays. The average daily trading volume in the past one week fell to 1.3 billion shares from two billion two weeks ago. The average daily value declined to RM1.4 billion from RM2.2 billion two weeks ago. Foreign institutions were the main buyers in the past one week amid the low market participation. The net buying from foreign institutions last week (Monday to Thursday) was RM87.9 million while net selling from local institution and local retail was RM34.3 million and RM53.6 million respectively.

Banking shares led gainers on the FTSE Bursa Malaysia KLCI index, with Hong Leong Financial Group up 2.1 percent and Public Bank trading 1.8 percent higher. In the FBM KLCI, gainers trounced decliners four to one. Top three weekly gainers for in the index were Kuala Lumpur Kepong Bhd (9.1 per cent in a week), IOI Corporation Bhd (6.7 per cent) and RHB Capital Bhd (5.5 per cent) while decliners in the index were led by Hong Leong Bank Bhd (two per cent), Felda Global Ventures Holdings Bhd (0.9 per cent), and Astro Malaysia Holdings (0.7 per cent).

Thai SET index was down 0.5 per cent by midday. Shares of the country's biggest energy firm PTT extended previous day's fall, down 0.6 per cent at 326 baht as a drop in oil prices dented its earnings outlook. Fourteen out of 22 analysts tracking PTT rated the stock “buy” or “strong buy,” seven put “hold” and one analyst has “sell,” Thomson Reuters data showed. Thanachart Securities said in a report last week it cut PTT target price to 318 baht (RM33.80) from 345. The Bank of Thailand has cut its GDP forecasts, from 1.5 per cent for 2014 and 4.8 per cent for next year. Its new projections will be released today. 

Weaker-than-expected manufacturing output in November weighed on sentiment in Singapore, with the key Straits Times Index trading slightly lower at 3,344.12. Shares of Keppel Corp and Singapore Exchange were among losers in active trading by market turnover. Vietnam's benchmark VN Index rose one per cent, with Hanoi-based lender Vietcombank outperforming the market after its shareholders approved a merger guideline at its extraordinary meeting. The Indonesia and Philippine markets were shut today, with trading to resume on Monday.

Gold Price is still unknown due to oil stagnant

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Gold, the ultimate inflation hedge, isn’t much use to investors these days. Gold futures fell the most in more than two weeks as a slump in oil cut the appeal of the metal as an inflation hedge. Volatility in the metal rose to the highest since January.

Oil is in a bear-market freefall that began in June, spearheading the longest commodity slump in at least a generation. The collapse means that instead of the surge in consumer prices that gold buyers have been expecting for much of the past decade, the U.S. is “dis-inflating,” according to Bill Gross, who used to run the world’s biggest bond fund. “The tumble in oil prices is detrimental to gold’s health,” David Meger, the director of metal trading at Vision Financial Markets in Chicago, said in a telephone interview. “Of course, the dollar and expectations of strong GDP continue to weigh on gold.”

“The general theme now seems to be one of a rising dollar and buoyant equity markets, leaving commodities vulnerable as an asset class. Short-term, we would keep an eye on North-Korean developments, as they could stir the markets if the retaliation intensifies,” INTL FCStone’s Ed Meir said.

In the wider-markets, the dollar rose 0.31 percent to 1.2192 against the euro, while Germany’s DAX and France’s CAC-40 were up 0.46 percent and 1.13 percent respectively. Meanwhile, US stocks climbed for a fourth straight session yesterday on Monday – the S&P 500 index closed at record high of 2078.54.

Brent crude oil is stagnant at around $60 per barrel after a warning from the Saudi oil minister that OPEC will not cut production from 30 million barrels per day even if oil falls to $20 a barrel and that the world may never see $100 a barrel again. OPEC may fear that a cut in Gulf production would invite competitors such as Russia to compete for its market share.

“The ability and apparent willingness of OPEC, and more specifically Saudi Arabia and the Gulf States, to hold production in the face of plunging prices may also mean the upside for gold prices is limited,” Steel added. “The threat of even lower oil prices is a clear negative for gold.”

Still, the general theme has been one of investors seeking riskier assets while the dollar remains strong at 1.2230 against the euro, US bond yields are picking up and equity markets flourish. “Positioning still seems to be light in gold so we expected the market to remain contained during the holiday period, but big swings in other markets such as USD and crude will exacerbate moves due to the light liquidity,” MKS’ Alex Thorndike said in a note.

"Gold just has so much going against it," the Wall Street Journal quotes strategist Ira Epstein at futures clearing merchants the Linn Group.

"It is not an asset people should buy right now."

"Gold as an inflation hedge is unnecessary," Bloomberg quotes chief investment officer Atul Lele at the $5-billion Deltec International Group.

Some analysts forecast a global gold market deficit by 2016 and that the gold price will be supported by “declining mine supply (2016 is four years after peak capex in 2012), as well as continued global bar hoarding and jewelry demand.”

The big question is whether inflationary pressures start to pick up. The recent plunge in oil prices has led many economists to reduce their estimates for inflation rates in 2015, as energy costs work their way into the prices of most consumer goods. Less wealth from energy-asset owners could weigh on their ability to spend and put upward pressure on prices, especially of luxury items. If inflation remains low even as unemployment falls further, then it would be the worst of all worlds for the gold market.

Asia Forex loss, Malaysian Ringgit Underperforms

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Asian currencies were broadly mixed versus the dollar today, although underlying improvement in risk sentiment supported some units, with the South Korean won climbing on year-end position squaring. The retreat in Asian currencies “could be related to the Russian ruble falling off and leading to emerging markets risk-off and some contagion effect,” said Sean Yokota, Singapore-based head of Asian strategy at Skandinaviska Enskilda Banken AB. “Risk appetite is declining as oil prices are moving lower.” The Philippine peso edged higher, helped by strong year-end remittance inflows from overseas Filipino workers.

The speculation in the market is that another RM70 billion can be expected to flow out of the country given the weakening ringgit vis-à-vis the USD. This is mainly due to foreign investors winding down their positions in the bond market. Malaysia could be in recession if the outflow reaches 20 per cent of GDP, a remote possibility at this juncture, according to economists. The ringgit has been under pressure since August Brent crude oil closed below US$100 a barrel. Oil is now at US$60 a barrel and still falling, ready to test the next psychological barrier at US$50.

The Malaysian ringgit was an underperformer, pressured by dollar-buying by interbank speculators and local market participants. Market sentiment toward emerging market currencies had soured in the early part of last week after sliding oil prices triggered volatility across a variety of assets and as a plunge in the Russian rouble spooked investors. Malaysia's status as a net oil export means low world oil prices have put both its current account and fiscal deficit under pressure.

However, an upbeat economic assessment by the US Federal Reserve at last week's policy review helped calm market nerves, while the mood has also improved as oil prices and the rouble bounced from their recent troughs.

Still, market participants were cautious on the outlook for Asian currencies.

A trader for a Malaysian bank in Kuala Lumpur said there had been some dollar-buying for Asian currencies today, adding that "nobody" wanted to be short the dollar. Most emerging regional currencies have fallen against the dollar this year, as the greenback rose on the back of market expectations for the Fed to start raising interest rates some time next year. The dollar is expected to maintain its broad strength against Asian currencies over the next several months, said Leong Sook Mei, Asean head of global markets research for the Bank of Tokyo-Mitsubishi UFJ in Singapore.

“We still have a dollar/Asia upside profile for at least all of the way to the middle of next year,” Leong said.

Still, a recovery in the US economy will be positive for Asian economies, she said, adding that Asian currencies may find some support as a result. The year 2015 will be tough for Asian currencies and every single major currency will drift lower against the US dollar. The Indian rupee, however, will be one of the few currencies that will cope with the greenback strength better. That’s the takeaway from the latest report released by HSBC on expected forex trends in the next year. In the report, analysts write that the broad strength seen in the dollar in 2014, thanks to resurging growth and the expected wind-down of accommodative Federal Reserve policy, will continue into 2015. Despite the headwinds for Asian currencies, it said the impact of potential capital outflows would likely be muted because Asian central banks had sufficient foreign currency reserves to manage volatility in their currencies. It said narrower interest rate differentials were likely to result in less demand for Asian currencies in carry trades.

Global Oil Price will rebound soon?

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Oil prices have been falling throughout 2014, nearly being halved since June as a result of disproportionally increased supplies. Last week, the price of Brent crude oil reached a five-year low after tumbling below USD 59 a barrel for the first time since May 2009. Oil prices have tumbled by half since June amid surging production and slower than expected demand growth. In recent months, oil prices have plunged on concerns about ample global supplies, as U.S. output continues to grow rapidly and members of the Organization of the Petroleum Exporting Countries have appeared reluctant to cut production to keep prices high.

Oil prices have nearly halved since their peak in June this year, their sharpest fall since the 2008 financial crisis. The slump has accelerated, falling almost 20%, since the Organization of the Petroleum Exporting Countries declined to cut output on Nov. 27 in response to a global supply glut. Oil futures rallied Friday, shaking off sharp losses earlier in the day and rebounding from their lowest settlement in more than five years. Oil fluctuated after the biggest increase in more than two years as Saudi Arabia said it was confident that prices would rebound as global economic growth boosts demand. West Texas Intermediate climbed as much as 5.2% in New York and Brent 4% in London. A measure of expected WTI futures movements and a gauge of options value was at the highest level since October 2011, data compiled by Bloombergshow.

While Ali Al-Naimi, Saudi Arabia's oil minister, said Friday that a slump in prices was temporary, he also said it would be “difficult, if not impossible” for Opec to curb its oil production amid a glut, the Saudi Press Agency reported. Prices rose immediately after his remarks, before ending the day at the lowest in five years. The nation accounted for about 13% of global oil output last year, BP Plc estimates.

“Oil continues to find value buyers when it falls to these levels,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “This is still a weak market. We’re looking at more supply, not less.”

Brent crude futures rose more than 2 percent toward $63 a barrel on Monday as Asian markets firmed into a holiday-shortened week and consensus spread that prices would likely remain above $60 for the rest of the year. MSCI`s broadest index of Asia-Pacific shares outside Japan extended gains and was up 1.4 percent. Japan`s Nikkei pared early gains but managed to eke out a 0.1 percent rise ahead of a Japanese public holiday on Tuesday, while Australian shares surged 1.9 percent.

Saudi Petroleum Minister Ali Naimi said Sunday that he was certain the oil market would recover with the improvement of the global economy. Oil peaked at $107 a barrel in June but has plunged since then due to weak demand, especially after Saudi Arabia and other members of the Organization of Petroleum Exporting Countries agreed to maintain production levels. Naimi, in a speech at an energy summit in Abu Dhabi, denied his government was trying to suppress oil prices. Asian markets were mostly higher Monday after the Fed's pledge not to rush to raise interest rates prompted investors to add risky assets ahead of the year-end holiday. A rise in the price of oil boosted energy stocks. 

Sustainable Growth to achieve in Malaysia's takaful segment

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Malaysia’s insurance and takaful sector is expected to be steady next year, underpinned by low insurance penetration and stable economic growth. With a strong banking sector as a back-up, the GCC governments have introduced Bancatakaful scheme which proved to be the most efficient channel in distributing tailor-made Islamic insurance products like medical takaful, the most sought after sharia-compliant product in the region. The Malaysian Takaful Association has forecast that takaful contributions will increase to QR10.99 billion ($3.02 billion) in 2014 from QR8.88 billion ($2.44 billion) last year, on the back of a market penetration rate of 14%.

“The demand for investment-linked products will continue to drive growth in the life sector, as consumers’ risk appetites increase amid low interest rates, while higher private consumption will sustain growth in the general insurance sector’s personal line products.

“Growth potential in the takaful segment is likely to be high, despite new regulations, supported by a growing range of products and wider distribution coverage,” Fitch Ratings said in a statement yesterday.

Fitch said more merger and acquisitions (M&A) activities were likely to take place in the takaful sector, as operators with limited operating scale and weak financial flexibility struggled with the new risk-based capital requirements.

“The new regulatory capital treatment is likely to spur some takaful operators to seek alternative funding sources to boost their capital needs,” it said, adding that credit profiles of industry players would be supported by ongoing premium expansion, sound capital buffers and stable underwriting margins.

It expected motor insurers’ adverse losses in compulsory motor insurance to improve progressively, although breakeven was unlikely. As awareness of wealth protection, savings and security benefits of takaful increases, families will increasingly demand such products as they broaden their use of Islamic financial services products. Given the existing low insurance penetration levels among GCC Muslim populations, it is plausible that takaful growth will outstrip conventional insurance growth over the next few years in the takaful and insurance sector.

With the high potential of the internationalisation of takaful, the urgency to grow and push for regional champions within high growth and stable regions is greater than ever. This will allow the industry to leap to the next level to realise its global market potential and position it as a strong ethical-based alternative to conventional insurance. Competition, operational issues and dearth of qualified talent continue to impact the sector's growth in the region. Profitability of takaful firms has been threatened not just by undifferentiated strategies but also the lack of uniform regulations allowing them to operate across different models. Undifferentiated business strategies mean most operators are competing intensely and this is likely to squeeze out the under-performers. With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options.

"This is the right time for takaful operators to invest in research and talent development to bring in much-needed creativity within the ambit of sharia principles. Furthermore, customers and takaful operators have shared the responsibility for enhancing customer awareness, as in my experience, takaful is the least understood concept of Islamic finance and banking, says Adeel Mushtaq, Director (Assurance and Advisory) with KPMG.

Oil Price Plunge Out of Control: Will $40 be Next?

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As the price of Brent crude fell below $60 for the first time since 2009, the most powerful nations in Opec have made clear that they are willing to push prices as low as $40 a barrel in their bid to take on Russia and US shale, a high-profile Gulf oil minister said this week. OPEC continues to put pressure on U.S. shale producers and countries like Russia and Venezuela by maintaining a stance of continued supply despite oil's price drop. Suhail al-Mazrouei, energy minister for the U.A.E., said OPEC wouldn't consider a supply cut just because oil might fall from $60 to $40 per barrel and will wait at least three months before considering an emergency meeting.

“There is a lot of crude coming on next year,” Juan Osuna, IHS Energy Inc.’s senior director for North American oil said in a phone interview Dec. 12. Producers “aren’t going to be happy, they will make a greater effort to cut costs, but they have been prepared for this.”

Tumbling prices have already had a profound impact around the globe, including in Britain where three times as many UK oil and gas firms have declared insolvency this year compared with 2013.

A report published on Monday by Moore Stephens, a UK accountancy firm, said that 18 UK oil and gas businesses became insolvent this year compared with just six in 2013, The Guardian reports. Jeremy Willmont at Moore Stephens said: "The fall in the oil price has translated into insolvencies in the oil and gas services sector remarkably quickly. The oil and gas services sector has enjoyed very strong trading conditions for the last 15 years, so perhaps they have not been quite so well prepared for a sustained deterioration in trading conditions as other sectors would have been. According to Willmont, expectations that prices will remain low for some time are fuelling the insolvencies: "There was a sharp drop in the oil price during the financial crisis, but the sense that oil prices could be depressed for some time is much more widespread this time around."

The oil market is oversupplied and someone has to cut production for oil prices to rise again. OPEC isn't blinking and so far neither is Big Oil or smaller producers like Continental Resources and Whiting Petroleum. That spells trouble for at least the next few months and I wouldn't be surprised to see oil hit $40 per barrel. But at that price, a lot of producers will be losing money and they'll have to cut production. The industry will come back eventually, but no one knows when. OPEC may be ready to endure a year of pain to kill some of the marginal players in energy. As oil prices drop to more than four-year lows, analysts are slashing their forecasts, with some predicting it could plunge as much as 40 percent to around $40 a barrel. "There is a possibility that if this price war becomes unmanageable, [we could] see prices down to about $40 a barrel [for WTI]," Jonathan Barratt, chief investment officer of Ayers Alliance Securities, told CNBC. But for oil to get all the way down to $40 a barrel would take "a massive lack of confidence in the economies, also a lack of pricing power," Barratt said.

“The market is oversupplied,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo said by phone. “Prices are falling and no one knows where the price floor is, however, we see some signs that investment in oil rigs in the U.S. is slowing.” When oil prices fall, there is no iron law that enhances global economic growth. The main effect is a huge redistribution from oil producers, who receive less for the effort of extracting the black gold, to consumers who benefit from cheaper transportation and energy, enabling them to spend more money on other goods and services or to save their windfall.

OPEC: Oil price fall is not related to a fundamentally sound market

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About two weeks back, the OPEC (Organization of the Petroleum Exporting Countries) oil producers’ cartel decided not to cut output at its meeting in Vienna. Since then, oil prices have plummeted to a record five-year low. Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member could potentially support global oil prices by cutting back its own production, but so far there has been no sign of this. The primary reason is said to be to put the US’s flourishing shale oil and gas industry on the back foot.

OPEC is not in control. 

For the second time in a week, OPEC officials intimated that the recent collapse in the price of oil is not related to OPEC’s actions or a fundamentally sound market. Speaking at an event in Dubai on Sunday, the secretary-general of the Organization of the Petroleum Exporting Countries, Abdullah al-Badri, said the price of oil had fallen further than market fundamentals would have dictated, reports Reuters.

“The fundamentals should not lead to this dramatic reduction (in price),” al-Badri said, according to Reuters.

Earlier this week, Saudi oil minister Ali Al-Naimi told Bloomberg, “Why should I cut production? You know what a market does for any commodity. It goes up and down and up and down.”

But as Business Insider’s Shane Ferro wrote last Wednesday: “The whole point of OPEC is to use collective action, through tightly controlling the world’s oil supply, to counteract the market forces that Al-Naimi is now saying should be allowed to move freely.”

All the oil politics aside, the oil consumers have been only too happy to save their oil dollars. While the drop may force many analysts back to their spreadsheets, the outlook for growth of solar (and other renewables as well) is still very much positive. However, global appetite for oil will grow at a slower pace in 2015 than earlier thought despite plunging prices, the International Energy Agency said Friday, warning of the risk of social instability in oil-producing countries such as Russia and Venezuela.

Oil demand for 2015 is now expected to grow by 0.9 million barrels a day to reach 93.3 million barrels, 230,000 barrels fewer than the previous forecast, it said in its fourth downward revision in five months. Crude prices have collapsed by more than 40 percent since June, and are now trading around $60 -- levels last seen five years ago, as increased US shale production adds to oversupply. But the cheap oil was not prompting more consumption.

OPEC had no target price for oil, Badri said in a reiteration of policy, and urged Gulf states to continue investing in exploration and production, saying the United States would continue to rely on Middle East crude for many years. Stopping new production projects would bring about a situation in which prices "will go back to $147 a barrel as in 2008. This was a result of a previous such situation," he said, recalling the potential market effect of a dearth in supply brought about by inadequate upstream investment.

Some commentators, including The Economist, have speculated that OPEC’s decision not to curb production amid tumbling oil prices was an effort to pressure US shale oil producers who have ramped up production significantly in the last few years.

In the first week of December, US weekly oil production came in at its highest level since 1986. On Friday, West Texas Intermediate crude oil settled at around $58 a barrel, while Brent crude oil was near $62, both five-year lows. According to Bloomberg, United Arab Emirates energy minister Suhail Al-Mazrouei said at the same conference in Dubai that, “We are not going to change our minds because the prices went to $60 or to $40 … the market will stabilize itself.” While oil cartel OPEC has previously acted against low prices by cutting output, this time round the group is sitting firmly against reducing supplies. Rather, it is in an all-out price war against US shale energy, in a battle to hold on to its market share. Industry players too have been forced to restructure and cut jobs, with petroleum giant BP Wednesday announcing an overhaul costing $1 billion.

Malaysia Palm Oil Futures rose as Export Tax Waived

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Malaysian palm oil futures rose on Wednesday, rebounding from near one-week lows hit in the previous session, as data showing a rise in palm oil exports in early December helped reinforce some optimism about the outlook for demand. But weak Brent crude kept palm oil gains in check, as low crude prices raised concerns that buyers could shift fuel demand away from palm. Brent crude futures fell below $66 a barrel, prompted by a glut of oil in the market. Steep losses in global crude oil markets and falling soy oil prices have stoked worries that buyers could shift food and fuel demand away from palm, although the weaker ringgit has provided some cushion. Exports of Malaysian palm oil products for December 1-10 rose 1.7 percent to 407,425 tonnes from 400,614 tonnes shipped during November 1-10, cargo surveyor Intertek Testing Services said on Wednesday. 

Indonesia and Malaysia, the world's top palm growers, will probably keep shipments of crude palm oil duty-free in January as prices struggle to pull away from five-year lows, and some players expect that to continue through the first quarter of 2015. Palm oil exports from Malaysia, which waived a levy on shipments for the final four months of 2014, will probably remain duty-free in January as average prices stay below a threshold for a tax to be imposed. 

International prices for crude palm oil have been sluggish, hovering near five-year lows amid the weak global economy (particularly slowing growth in the world’s two largest CPO importing countries, India and China, provides downward pressures on prices). Moreover, sharply falling oil prices in recent months imply that there demand for palm oil-based biofuels reduces. Palm oil futures in Kuala Lumpur traded at 2,174 ringgit (USD $625) per metric ton on Wednesday (10/12), having improved slightly from the recent low of 1,914 ringgit (USD $572) per ton in early September after global CPO demand rose due to the zero percent CPO export tariffs in Malaysia and Indonesia. However, stakeholders and analysts in the palm oil industry estimate that CPO prices will remain sluggish throughout the first quarter of 2015.

While demand from China and Europe usually slows during the winter, duty-free exports and the weaker ringgit may boost shipments from Malaysia to countries like India and Bangladesh, Ng said. The tropical oil clouds in cooler temperatures.

Malaysia removed the duty for September and October and extended the waiver for two months to try to curb the buildup of reserves and support prices of its most valuable farm-commodity export. While the move helped spur a bull market, futures still lost 19 percent this year as demand for the tropical oil used in food and biofuels fell amid a global glut and a slump in crude prices. Data today showed Malaysian reserves climbed to the highest level since February 2013. Any extension of Malaysia’s tax exemption will help make the country’s palm oil competitive against Indonesia’s as well as against other edible oils, according to Franki Anthony Dass, executive vice president of the plantation division at Sime Darby Bhd., the biggest listed producer. It would help to ease Malaysian stockpiles, Dass said in a text message on Dec. 8.

Cheaper crude prices dent appetite for palm oil as a "green" additive for discretionary blending of biofuels. Market players are optimistic that the tax exemption could spur demand in palm's biggest consumers, including China, which will be stocking up on the tropical oil ahead of Lunar New Year festivities in February.

“If the government wants to help to bring down the stocks and also try to create some kind of buying market for the consumer to import, I hope that it can maintain the tax at zero for February and March as well,” Donny Khor, deputy director of futures and options at RHB Investment Bank Bhd., said by phone on Dec. 8.

1MDB's ability to repay debts to bail out itself

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Malaysians could end up paying more for electricity over the next few years as Putrajaya helps debt-ridden 1Malaysia Development Berhad (1MDB) settle its loans totalling RM42 billion, said Petaling Jaya Utara MP Tony Pua. Since 2011, 1MDB has achieved profitability entirely as a result of revaluation of properties which were sold to 1MDB by the federal government at heavily discounted prices. In 2011, 1MDB made a profit of RM544 million on the back of a property revaluation of RM827 million. In 2012 and 2013, 1MDB continued to make profits of RM45 million and RM778 million on the back of RM570 million and RM2,736 million in property revaluation respectively. For the most recent financial year, 1MDB made a loss of RM665 million despite a revaluation of RM897 million.

In a recent case, 1MDB has had to postpone the payment of RM317.3 million for the purchase of land from Tadmax Resources, he said.

“It still cannot pay that amount till today and yet the government boasts that it has billions. There is something not quite right about this.

“The truth is, its loan costs are too high and its earnings are too low,” said Pua.

The press briefing became even more urgent because the company had just suffered a reversal of fortune. It reported a group loss of RM665.3 million for the financial year ended March 31, 2014 against a profit of RM778.2 million the previous year.

Admittedly, 1MDB does have some good assets although they might have been purchased at inflated prices. To show some semblance of balance between its assets and liabilities, it had resorted to revaluing its assets yearly, which is not done by other developers. A case in point is its Tun Abdul Razak Exchange (TRX), now under development in Kuala Lumpur. The 70-acre prime land was bought cheaply from the government and re-valued several times to produce what some call “paper profits.” As some analysts put it, many of the things Lodin revealed at the press conference are different from what is in 1MDB’s book. For instance, its highly controversial RM7.7-billion “investment” with a Segregated Portfolio Company (SPC) in the Caribbean tax haven of Cayman Islands and managed by Hong Kong-based Bridge Partners.

One analyst said, for all the controversies the fund transfer generated, the company earned only RM437 million in dividends, which represents a paltry return of 3.26%. A further question is, how does this rate of return compares with its cost of funds?

Deputy Finance Minister, Datuk Ahmad Maslan, in his gallant attempts to defend the company in the Dewan Rakyat had been found to have given misleading information while his efforts to cast 1MDB in a kinder light by revealing that it had spent RM382 million on corporate social responsibility (CSR) activities is debatable because the company’s principal responsibility is to its shareholders. A loss-making company is not expected to be generous with shareholders’ funds. It is an open secret that 1MDB spent lavishly, particularly in Penang, during the last general elections, feasting and entertaining the people of the DAP-led state. It also paid close to RM2 billion for several pieces of land in the state days before last year’s GE, leading to the Penang Chief Minister, Lim Guan Eng, to wonder why the company paid almost 100% higher than what the land in the state was valued just two years earlier in December 2011.

For 2015, 1MDB’s operating income is not going to increase because the new contracts for power plants are not even built yet. At the same time, work hasn’t even started for Tun Razak Exchange and Bandar Malaysia for any revenues to be recognised. Since financing cost is expected to be even higher due to costly loan restructuring which was undertaken, 1MDB would therefore not fall too far to convince Malaysian if the losses were not higher for the year ending March 2015.