Markets barely flinch at Venezuelan news

Phew, the year started fast, giving us a rapid heads up that we might be heading into another geopolitically tense year.

The US entered Venezuela and took Maduro out on Saturday. From a market perspective, what happened last Saturday in Venezuela means higher volatility in oil prices, risk premia creeping back into asset prices and markets being forced to react to political shockwaves as soon as many investors return to their desks. But overall feeling is way more relaxed than that.

In oil, Brent crude opened the week above $61/bbl, while US crude tested $58/bbl offers before gains were quickly given back. Venezuela is known to have the largest oil reserves in the world — more than 300 bn barrels, even more than Saudi Arabia (around 267 bn barrels according to a chart published by Al Jazeera) — but its oil exports are far below major exporters like Saudi Arabia ($181 bn), the US ($125 bn) and Russia ($122 bn). In 2023, Venezuela exported just $4.5 bn worth of crude — a very little fraction of Saudi Arabia’s $181 bn — due to aging refinery infrastructure, years of underinvestment, technical challenges and of course, sanctions.

As a result, Venezuela pumps around 800K barrels per day — a third of what it used to a decade ago, and less than 1% of global supplies. In terms of supply risk, that’s almost negligible, especially considering that the crude market is well supplied: the IEA projects a record oil surplus this year, while Trafigura warns of a potential “super glut.” This explains why a potential supply shock in Venezuela is unlikely to reverse the bearish trend — particularly since the US did not touch any oil facilities during last weekend’s operations and sanctions on Venezuelan oil remain in place.

Looking further ahead, if sanctions are lifted and production recovers, output could rise — but only by about 150K barrels per day, according to consultants at Kypler — and it would take years, and massive investment, to bring Venezuela’s oil production back to pre-crisis levels of above 2 mbpd.

Trump has said they will rebuild Venezuela, and they certainly will. For context, Iraq was producing around 2.5 mbpd just before the US-led invasion in early 2003. After the invasion, production and exports initially slumped due to conflict and infrastructure damage, but by the 2010s export levels had climbed back to around 2–2.5 mbpd. Last year, Iraq was exporting even more — around 3.3–3.6 mbpd on average, depending on OPEC quotas and pipeline flows.

So, the long-term impact of US strategy could suggest higher supply and lower energy prices — just as Trump would like! This is certainly why we see oil bears jumping in rapidly to choke off the rally.

Unsurprisingly, safe-haven assets — led by gold — are enjoying a positive ride this morning. The yellow metal, which traded at a fresh record above $4’500 by the end of December but closed the year with a sharp decline below $4’400, is back above that level this Monday. Silver is up more than 3.6% at the time of writing, while the Swiss franc is softer against a broadly bid US dollar, and there is no particular sign of stress or lack of appetite across risk assets.

A quick word on US 10-year bonds: we weren’t sure whether the Venezuela news would boost haven demand or fuel concerns that higher US military spending could increase fiscal pressures. Judging by the initial market reaction, US 10-year yields are holding steady — likely because investors are not feeling particularly stressed about Venezuela.

One interesting place to watch in this Venezuela story is Bitcoin. The coin has been rising since news of US intervention broke, as some estimates suggest Venezuela is sitting on a large shadow reserve of more than 600K coins.

How did they accumulate so much Bitcoin? Several reports and intelligence-focused write-ups claim Venezuela may have converted gold from the Orinoco Mining Arc into Bitcoin when prices were low (around ~$5K) to build a “shadow reserve” and evade sanctions. Other reports suggest they accepted USDT in exchange for oil sales and converted those stablecoins into Bitcoin to avoid potential freezes. Consequently, they are thought to be sitting on 600K Bitcoins worth more than $55 bn at today’s price — which could affect supply if these assets are seized by the US Department of Justice due to narco-terrorism charges or held in strategic reserves.

Anyway, what a first Monday of the year!

Today, eyes will be on Nvidia and AMD CEOs speaking at the CES conference, and later this week, investors will closely watch the US jobs report for insights on Federal Reserve (Fed) expectations and potential market implications.

For now, last week was bullish for tech stocks, even though the S&P500 and Nasdaq kicked off the year on a weak note. Let’s see if Jensen Huang can do something about it.