Oil, defense stocks and rare earth metals rise on Venezuela bets

Crude Oil — which initially failed to convince bulls in Asia on the Venezuelan news — ended up rallying as Europe stepped in. The US session then pushed a barrel of US crude above the $58.50 level. Crude is again under pressure this morning in Asia, hovering just above the $58pb mark. As we discussed in detail yesterday, the hesitation comes from the fact that Venezuela’s vast oil fields suffer from years of underinvestment and ageing technology, which prevents the country from pumping and exporting oil at scale. Despite sitting on the world’s largest oil reserves, the country exports less than 1% of global supply.

But Trump has a plan. He wants to send American oil giants in to “spend billions of dollars, fix the badly broken infrastructure and start making money for the country” — and for themselves, of course — an idea that clearly pleased oil stock investors yesterday, sending the S&P 500’s energy sector up by 2.72% to a fresh record high. If you were not sufficiently convinced that softer Federal Reserve (Fed) rates, rising inflation risks and the rotation trade would benefit oil stocks, this may have done the trick.

And of course, there are worries that US ambitions wouldn’t stop at Venezuela. Trump is also looking at Denmark’s Greenland for example - for its strategic positioning and access to critical metals.

There is no doubt that moving into Greenland and taking control would be dramatic for the world order — it would signal the end of NATO as we know it and the beginning of a new, darker era for global geopolitics. While still extreme, it is a scenario that can no longer be completely ruled out.

That explains why European defence stocks kicked off the week on strong footing. The STOXX Aerospace & Defence ETF jumped more than 4% yesterday, at a time when gains were expected to stall after last year’s near-100% rally. Unfortunately, the outlook for global defence stocks has suddenly improved since last weekend.

Another big winner of the Venezuela incident is rare earth metals. That’s because China is watching Maduro’s capture with great concern. Beijing has provided loans for years to rebuild and upgrade Venezuela’s oil infrastructure and refineries in exchange for cheaper access to its oil. If the US takes hold of Venezuelan oil, China would effectively lose that privileged access. The expectation is therefore that China could retaliate — and one of the most effective tools, as we saw last year, is restricting rare earth exports to the US. That prospect pushed VanEck’s Rare Earth Metals ETF up 3.82%, to its highest level since last October.

The good news is that Venezuela also holds rare earth resources that the US could potentially exploit to reduce its dependence on China. The problem is that the US cannot turn its back on China overnight: China remains, by far, the world’s dominant exporter of rare earths, accounting for more than two-thirds of global production.

Why are rare earths so important to the US? Because they are critical inputs for technology — and no one wants avoidable supply constraints in the middle of a global tech war.

In summary, oil and defence stocks, along with rare earth metals, have been the biggest gainers from the Venezuela news. The UK’s energy- and mining-heavy FTSE 100 traded past the 10,000p mark for the second session in a row and closed above that level for the first time.

As for crude oil itself, if US oil companies step in and successfully raise production, the medium-term outlook for oil prices would likely turn more negative.

Beyond Venezuela, investors also watched economic data showing that US manufacturing activity contracted for a tenth straight month in December, while a rapid drawdown in inventories suggested companies are relying on existing stockpiles to meet softening demand. That raises an important question: what happens to inflation when inventories are rebuilt at tariff-boosted prices? For now, investors remain comfortable that inflation will stay in check — as reflected in falling US two-year yields.

As a result, the US dollar reversed early Asian gains on Monday and remains under decent selling pressure in Asia this morning. The EURUSD is better bid after rebounding from its 100-DMA. The next key resistance sits at the psychological 1.18 level, tested but not broken around Christmas. Traders will watch European inflation and PMI data today to shape European Central Bank (ECB) expectations. The ECB is not expected to change interest rates this year, as policymakers see actual rates as being in a relatively comfortable position to manage two-sided inflation and growth risks amid geopolitical uncertainty.

Let’s finish on a brighter note. Tech investors kicked off the new year with solid appetite. South Korea’s Kospi has already broken three records since the start of the year, while the Hang Seng is closing the gap with last October’s peak. In Europe, ASML gained nearly 15% in the first two trading sessions of the year on strong AI demand.

At his CES speech yesterday, Nvidia CEO Jensen Huang highlighted two key developments. First, he said the Rubin chip — Nvidia’s next-generation processor — delivers sharply higher performance than Blackwell in both training (x3.5 times) and inference (x5 times), while being cheaper to operate thanks to fewer components. He added that demand is “really high” and that major clients, including Microsoft, could begin using it in the second half of the year. Second, he unveiled a vehicle platform called Alpamayo aimed at improving autonomous driving reasoning capabilities, part of Nvidia’s push into physical AI.

Nvidia shares were testing the 50-DMA to the downside ahead of the speech. The question now is whether these announcements can bring investors back in, despite lingering concerns over elevated AI valuations, deal circularity and leveraged AI investment.