How Venezuela (and Other Geopolitical Situations) Could Impact Markets The first surprise of the year came early as U.S. forces infiltrated Venezuela and arrested President Maduro, adding to a now lengthy list of geopolitical “hot spots” for investors to consider as we start the year. Given this surprise news and Venezuela’s position as a major oil exporter, I wanted to explore how the Venezuela news (and other geopolitical hotspots) could impact markets in the new year. Starting with Venezuela, while the situation remains very fluid, especially regarding who is running the country, the reality is that it is unlikely to impact markets (joining the list of other hotspots that have similarly not impacted markets despite shocking headlines). The reason the ouster of Maduro is unlikely to impact markets is the same one that explains why the Russia/ Ukraine war hasn’t impacted markets, nor the heightened U.S./Iran tensions: Oil supplies. Markets look at geopolitical events solely through the lens of impacts of critical resources (mostly oil), and unless the event is going to reduce the supply of available oil (and make the price rise, which could slow global growth), then markets will largely ignore the event. In the case of Venezuela, if anything, the events of the weekend could boost oil supplies. Since Venezuela nationalized their oil sector over a decade ago under then President Hugo Chavez, oil production from the country has declined. Loosely, oil production from Venezuela has declined from 3 million barrels per day to approximately 1 million barrels per day currently. Regardless of the political future for Venezuela, it’s reasonable to assume that Western oil companies will be let back into the country, and with improvements, the trend for oil production from Venezuela should be higher, not lower. That could add to an already globally oversupplied oil market, which should pressure oil prices over time (and that’s good for global growth and corporate profits). Looking forward, from a market standpoint, the key variable for Venezuela going forward is oil production, and unless news breaks that implies oil production is decreasing, it shouldn’t impact markets. Turning to the other two geopolitical hot spots, Russia/Ukraine and U.S./Iran (where tensions are rising again), the key for both remains oil supplies. Barring major damage to Russian oil infrastructure (which seems unlikely), the stalemated conflict remains unlikely to negatively impact markets. Regarding the U.S. and Iran, as we saw last summer, direct conflict did not spike oil prices sustainably, in part because Iran isn’t a major global oil exporter anymore due to sanctions and poor infrastructure. However, if a conflict between the U.S. and Iran results in the closing of the Strait of Hormuz or other major global oil transit, that would create a negative impact on markets as oil prices would rise sharply in response. Cutting through the headline noise of geopolitical events to focus on direct market impact can be challenging, but unless these conflicts directly impact supplies of a vital economic resource (e.g., oil), they are unlikely to negatively impact markets, and that is likely the case with Venezuela, despite the shocking headlines and actions. So far, the markets are celebrating the new year and have not begun concentrating on the midterm elections. That is because the economic news is quite good and will remain good barring any surprises, but we stay vigilant to that possibility. |
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc. Source: Seven's Report 1-5-26 |
How Venezuela (and Other Geopolitical Situations) Could Impact Markets
