One week away from the OPEC meeting it is clear that there has been some difficulty reaching a consensus. We previously discussed the reticence of Iran to agree to an increase in production. The limitation of Iran's ability to fully participate in production increases has been behind their position of maintaining the current levels.

More important is that OPEC is moving into uncharted territory. They are attempting to manage a price decline. The difficulty is that they are trying to do this with very limited data and members with differing needs and goals. OPEC is generally able to overcome national and regional differences. The data always presents problems.

Any mistake in the production level could trigger a price collapse. It is particularly difficult to do it at this time of year when consumption normally declines. The peak to trough in quarterly consumption is over two million barrels per day and this production increase comes in the period of low demand. Admittedly, inventories are low and refiners would like to stock up but they are unwilling to do so if they perceive that prices may continue to decline. 

1. Determine the appropriate production increase
2. Establish and publicly announce a price goal. 
3. Establish a mechanism to adjust the production levels in a relatively short period of time.

Step 1. Because of the data problems and the usual difficulties in forecasting, the production level will in all probability need adjustment. It is for this reason that steps two and three are necessary.

Step 2. Announcing a target will help remove uncertainty in the market. In particular it will help to flatten out the forward months in the futures market. If refiners believe that the risk of lower prices in the near future is minimal they will be more willing to rebuild their low inventories.

Step 3.: Although it will help, announcing a target for prices is not sufficient for the market to believe that it will happen. Therefore, OPEC needs a mechanism for adjusting prices in the short term. As it is unlikely that OPEC will establish an automatic mechanism or committee to adjust production, they could do the next best thing. OPEC could publicly announce a price target and schedule a meeting for the end of June. This would give the refiners more confidence in prices and reduce their price risk of rebuilding inventories. If OPEC misses the targeted price, refiners would be aware that OPEC would have an opportunity to adjust production in a relatively short period of time. To encourage refiners to build inventory, it is key that the price risk is reduced .