Oil News: Venezuela Is Desperate, Begs OPEC Partners to Cut Oil Production
In great evils, great means. As oil prices continue to sell off, Venezuelan President Nicholas Maduro traveled to the Middle East to discuss the situation with fellow OPEC members Iran and Saudi Arabia. The leader of the struggling South American nation is doing everything he can to keep his country’s finances afloat, which have been further decimated by soaring oil prices.
Out of control
Venezuela’s financial situation is really starting to spiral out of control. Falling oil prices have exacerbated the country’s problems, which now faces a recession accompanied by runaway inflation and shortages of basic necessities. The heavily indebted nation is also facing widespread concerns that it will have no choice but to default on its debt before the end of the year. His financial situation becoming increasingly precarious the day Venezuelan President Maduro seeks help abroad.
Maduro’s first stop was actually in China, which has been the country’s biggest financial backer. China has given Venezuela more than $50 billion in loans since 2007, of which about $20 billion is still outstanding. These loans were backed by oil and because of this, about half of Venezuela’s oil ships to China are used to service its debt every day. However, their relationship is set to take on another dimension as this week China agreed to invest $20 billion over the next decade in a variety of energy, social and industrial projects. That being said, it is not the answer to the country’s fiscal problems as it desperately needs higher oil prices to provide it with the revenue it needs to stay afloat.
Begging his OPEC brothers
This is why Maduro recently traveled to Iran to meet its leader. The two OPEC members hope to work with other members, as well as other major oil-producing states like Russia, to cooperate in an effort to stabilize oil prices. Indeed, an already weak oil market all but collapsed after OPEC decided to stay firm on production in November, sending oil prices down another 29%.
All in all, the price of oil is now more than 50% below its 2014 peak, with no bottom in sight due to an oversupplied market.
Maduro and Iranian President Hassan Rouhani agreed that OPEC should intervene to stabilize an acceptable (i.e. higher) oil price in 2015. Both suggested that Saudi Arabia, which controls a third of OPEC oil, uses oil as a political weapon by refusing to reduce production. However, they consider that this position only hurts the other members.
This is why Maduro’s next step was to meet directly with Saudi Crown Prince Salman to discuss the situation and seek ways to improve the price of oil. However, the price of oil is not as much of a concern for the Saudis as the kingdom is in much better financial shape as it has hundreds of billions of dollars in the bank which it can use to fill years of budget gaps. Moreover, the Saudis do not believe that an OPEC production cut will have such a large impact on oil prices, as demand must be higher while oil supplies from other regions at cost. higher, such as US shale, must be removed from the market. For this reason, it would appear that Saudi Arabia is prepared to stand firm and let the oil market phase out some of this higher-cost production before considering a production cut.
Takeaway for investors
The Venezuelan president is desperately trying to save his country’s finances by seeking help around the world. While China appears willing to help, it seems unlikely that it will be able to convince Saudi Arabia that OPEC should cut oil production. So, until Saudi Arabia changes its mind, 2015 is likely to continue to be a very volatile year, both for oil prices and oil company stock prices.