OPEC looks to keep oil prices stable by setting price floors

Oil investors and exporting nations are undoubtedly willing to have oil prices return to $70 a dollar, and they will be counting on an old trick to have it so.

Come October 21, OPEC’s technical experts, along with experts from some other non-OPEC countries will meet in Vienna to discuss setting up a plan to prop up the price of oil. The plan: progressive production cuts to control prices, with a “first floor” of $70 per barrel and a later target of $100 per barrel.

The plan was articulated by former Venezuela oil minister Rafael Ramirez in an interview with Reuters.

Ramirez, who has been a recognizable face in the Venezuelan oil scene since the last decade, has often worked closely with Saudi Oil Minister Ali al-Naimi, one of the few remaining OPEC ministers from the previous decade, when the group was more united.

Although the plan is already being tipped to fail, analysts say it can at least have the effect of starting a discussion among the major oil players to save the market.

In the current episode of oil price collapse which has lasted more than a year, the major oil players have abandoned their strategy of output-manipulated price support. And there aren’t encouraging signs that they will reverse their decisions.

Saudi Arabia, the group’s de facto leader, has shown no intention of returning to a strategy of supporting prices; Russia has ruled out cuts. Most analysts say attempting to set a price range is futile, or that the $70 price is unsustainably high.

The price band formula being promoted has been used before as a way out of crisis. After the late 1990’s collapse in prices to $10 a barrel, the group set a band of $22 to $28 a barrel. It was abandoned in 2005 as soaring demand caused prices to rise, and the group has never formally set any target or range since then.

Now, the major oil players are more concerned with protecting their markets, and expanding even further by cannibalizing their peers.

However, with oil exporters becoming weary of the protracted decline, a willingness to listen to solutions is seen.

Among other things, players want to see a price anchor in the market

Although there will not be problems listening to solutions, the problem will be in staying committed to the plan, and actually constraining output to make the plan effective.

There is little faith that players will actually constrain production. Analysts say that although the price floor will not be achieved, it can give the markets a price reference to target, and create a possibility for the wide fluctuations to stop.