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Government: Power tariffs will not change despite oil prices jump, PN says they should fall

Efforts to have 'least possible impact' on fuel prices early next year

Updated, adds PN statement

The government promised today that local power tariffs will not change despite a jump in the international oil price following a decision by Opec oil producing nations to cut production.

In a statement, the prime minister was also quoted as saying that efforts were being made to ensure that the oil price hike would have the least possible impact on fuel prices in the first few months of next year.

Oil prices rose more than four per cent today, with Brent crude at its highest in about 16 months, extending gains after OPEC and Russia agreed to restrict output to speed up the rebalancing of a long-oversupplied market.

Prices have risen by some 9% this week, but the government in a statement quoted Prime Minister Joseph Muscat saying that thanks to the measures taken to reduce dependence on oil, local power tariffs will not change. 

"Had we not decided to switch to gas, we would today be worried about how to announce a rise in the tariffs by almost 10%”, Dr Muscat said.

But this would not happen and local prices would stay low and stable. 

Had the government opted to follow market movements, as the opposition wanted, prices would have had to rise, he added.  

He said that fuel prices were also fixed for the coming weeks and the government was working to ensure the spike in oil prices would have the least possible impact on fuel prices in the first few months of next year. 

PN reaction - tariffs should be reduced

In a reaction, the Nationalist Party said the government had kept power tariffs high for two years despite the sharp fall in the international oil price. Now the prime minister expected to be thanked for not raising tariffs after oil prices rose slightly. 

"The truth is that the prime minister could have easily reduced tariffs in the past two years but he chose not to do so. He could have reduced tariffs not only because oil prices had dropped, but also because Malta could buy electricity cheaply through the interconnector built by the PN government," the party said.

But to make matters worse, the prime minister has agreed to buy electricity at high rates for 18 years from Electrogas  when he could easily have bought it at half the price through the interconnector."

One had to be corrupt to go for expensive power procurement when knowing that power could be bought cheaper elsewhere," it added. 

Opec agreement

The Organization of the Petroleum Exporting Countries agreed yesterday its first oil output reduction since 2008 after de-facto leader Saudi Arabia accepted "a big hit" and dropped a demand that arch-rival Iran also slash output.

The deal also included the group's first coordinated action with non-OPEC member Russia in 15 years. Today, Azerbaijan said it was also willing to engage in talks on cuts. 

Despite the historic deal, doubts were widespread in the market.

"It remains to be seen how well they stick to the plan, but if OPEC hadn't come to an agreement the probability is that oil prices would have fallen to $40 a barrel, perhaps even lower," said Simon Flowers, chief analyst at consultancy Wood Mackenzie.

"Brent was trading at about $50 a barrel after the announcement, and we expect it to trade at an average of $55-$60 per barrel in 2017."

Benchmark Brent futures for February delivery jumped as much as 4.8 percent to $54.36 a barrel, the highest since July 30, 2015.  

U.S. crude rose $1.98, or 4 percent, to $51.42, after rising to a high of $51.72 a barrel, about 20 cents below its 2016 high.

U.S. refined products also rose along with crude - ultra low sulfur diesel (ULSD) futures soared as much as 5.5 percent to its highest in more than a year while gasoline futures jumped about 6 percent.

The OPEC deal also triggered frenzied trading, with Brent futures trading volumes for February and March - when the supply cuts should start to be visible in the market - hitting record volumes.

The Intercontinental Exchange Inc also said ICE Brent crude futures hit a daily volume record of 1.96 million contracts on Wednesday.

Oil prices are still only at September-October levels - when plans for a cut were first announced - and crude prices are less than half mid-2014 levels, when the oil price began to collapse to its lowest in a generation.

OPEC produces a third of global oil, or around 33.6 million bpd, and the deal aims to reduce output by 1.2 million bpd from January 2017, similar to January 2016 levels.

"It's clearly too soon to know what beyond the short-term market gain will be the consequences of this mini-renaissance of OPEC - for other producers and for the group itself," Credit Suisse analysts said.

Others noted that the cuts could leave the field open for other producers, especially U.S. shale drillers.

"We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the U.S.," Goldman Sachs said.

The head of the International Energy Agency Fatih Birol warned of greater volatility after the OPEC deal.

"Unlike in the past OPEC decisions, if prices move to around $60, a substantial amount of oil in United states is ready to come to the markets," Birol said.

Coinciding with the OPEC cuts, supply of the four major North Sea grades of crude oil will hit a one-year high next month, according to monthly loading programmes.

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