A $70 oil floor? Fat chance, but OPEC price plan may be first step

Wed Oct 14, 2015 7:01am EDT
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By Marianna Parraga and Jonathan Leff

HOUSTON/NEW YORK (Reuters) - The safe money for oil traders is betting that Venezuela's plan to resurrect OPEC's old price band mechanism, attempting to set a $70 floor for the battered market, will be doomed from the start.

Saudi Arabia, the group's de facto leader, has shown zero interest in returning to a strategy of supporting prices; big producers outside the Organization of Petroleum Exporting Countries, namely Russia, have essentially ruled out cuts. And most analysts say attempting to set a price range is futile, or that the $70 price is unsustainably high, or both.

Yet a handful of experts and observers say the proposal - articulated by former oil minister Rafael Ramirez in an interview with Reuters - may be a catalyst for moving away from OPEC's laissez faire approach to collapsing oil prices, which throttled investment, shredded budgets and left some economies, such as Venezuela's, teetering on the brink.

Even if the idea fails to advance, it could represent the first meaningful step in months toward finding common ground that could help stabilize the oil market.

The plan, to be discussed at an Oct. 21 meeting of technical experts in Vienna, seems simple: progressive production cuts to control prices, with a "first floor" of $70 per barrel and a later target of $100 per barrel, Ramirez explained.

His comments come after months of presidential visits and vague statements by President Nicolas Maduro, most of which has been dismissed as a desperate effort by a precarious leader with little history of petro-diplomacy.

Ramirez, by contrast, was the public face of Venezuela's oil policy for over a decade, working closely and often with Saudi Oil Minister Ali al-Naimi - one of the only remaining OPEC ministers from the previous decade, among the group’s most cohesive periods - as oil prices raced from $20 a barrel to nearly $150 and back down again after the financial crisis.

"I think this one might have more substance," said Paul Horsnell, head of Commodities Research from Standard Chartered, who has been writing about oil markets and OPEC for two decades.   Continued...

An oil pump is seen in Lagunillas, Ciudad Ojeda, in the state of Zulia, Venezuela, March 18, 2015. REUTERS/Isaac Urrutia