Oil News: Venezuela Gets Desperate and Begs OPEC Partners to Cut Oil Production

By Markets Fool.com

Desperate times call for desperate measures. With oil prices continuing an unrelenting sell-off Venezuelan President Nicholas Maduro headed 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 the plugging oil prices.

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Spiraling out of control
Venezuela's financial situation is really starting to spiral out of control. Falling oil prices have exacerbated problems in the nation, which is now facing a recession to go along with surging inflation and shortages of basic necessities. The highly indebted nation is also faced with widespread worries that it will have no choice but to default on its debt before the end of the year. With its financial situation growing more precarious by the day Venezuelan President Maduro is looking abroad for assistance.

Maduro's first stop was actually to China, which has been the country's biggest financial backer. China has granted Venezuela more than $50 billion in loans since 2007, with about $20 billion of that still being outstanding. These loans have been backed by oil and because of that about half of the oil Venezuela ships to China each day goes to service its debt. However, their relationship is about to take on another level as this week China has agreed to invest $20 billion over the next decade in a variety of energy, social and industrial projects. That being said, this isn't the answer to the country's fiscal issues as it desperately needs higher oil prices to provide it with the income it needs to stay afloat.

Begging its OPEC brethren
This is why Maduro recently visited Iran to meet with its leader. The two OPEC members are hoping to work with other members, as well as other large oil-producing states like Russia, to cooperate in an effort to stabilize oil prices. This is because an already weak oil market has virtually collapsed after OPEC decided to stand firm on production in November, sending oil prices down another 29%.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

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All told, the price of oil is now more than 50% below its peak in 2014, with no bottom in sight due to an oversupplied market.

Both Maduro and Iranian President Hassan Rouhani agreed that OPEC needed to step in to stabilize an acceptable (i.e. higher) oil price in 2015. Both suggested that Saudi Arabia, which controls a third of OPEC's oil, is using oil as a political weapon by refusing to cut production. However, they see this stance as only hurting fellow members.

This is why Maduro's next stop was to meet directly with Saudi Arabia's Crown Prince Salman to discuss the situation and look for ways to improve the price of oil. However, the price of oil isn't as much of a concern for the Saudis as the kingdom is in much better financial shape as it has hundreds of billion dollars in the bank that it can use to bridge years of budget gaps. Further, the Saudis don't think a production cut by OPEC will have all that much of an impact on oil prices as demand needs to be higher while oil supplies from other higher cost regions, such as U.S. shale, needs to be taken out of the market. Because of this it would appear that Saudi Arabia is willing to stand firm and let the oil market flush out some of this higher cost production before its willing to consider a production cut.

Investor takeaway
Venezuela's President is desperately trying to save his country's finances by seeking help from around the world. While China seems willing to help it out, it appears unlikely that it will be able to convince Saudi Arabia that OPEC needs to cut oil production. So, until Saudi Arabia changes its mind 2015 will likely continue to be a very volatile year for both the price of oil and as well as the stock prices of oil companies.

The article Oil News: Venezuela Gets Desperate and Begs OPEC Partners to Cut Oil Production originally appeared on Fool.com.

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