Venezuelan Regime Change Investment Implications

We have the following thoughts after the capture and arrest of Venezuelan President Maduro and his wife by U.S. forces.

• The Trump administration cited drug trafficking, Venezuelan gang members being sent to the U.S., the presence of Iranian and Cuban operatives in Venezuela, and Venezuelan oil exports benefitting U.S. adversaries at the expense of the Venezuelan people for the decision to capture Maduro. These comments highlight that Venezuela presented a confluence of concerns to the Trump administration, including the desire to reinvigorate the Monroe Doctrine; reduce the malign influence of Russia, China, and Iran; reduce the flow of drugs and illegal immigrants; and boost energy production in the Western Hemisphere.
• While Maduro’s vice president, Delcy Rodriguez, was sworn in as interim president, President Trump stated that the U.S. would run Venezuela indefinitely until a safe, proper, and judicious transition could be arranged. On Sunday, Secretary of State Marco Rubio played down expectations of a quick return to democracy, saying it was unrealistic. Rubio outlined the more immediate goals for the U.S. in dealing with the Venezuelan regime under Rodríguez, and said Washington would use a blockade on Venezuelan oil exports and the threat of further military force as leverage to force the government to change its behavior.
• While this implies significant uncertainty for the future of Venezuela, the overall impact on financial markets is likely to remain limited, as evidenced by the stock market being up as of this writing.
• The major impact is likely to occur in the oil markets. While Venezuela currently produces around one million barrels per day, roughly 1% of global output, it has the world’s largest proven crude oil reserves of over 300 billion barrels. However, given the poor state of the country’s energy infrastructure after years of neglect, and the uncertainty mentioned above, we do not anticipate Venezuelan oil production to increase anytime soon.
• Longer-term, increased Venezuelan production could create a significant excess supply in a market that is already oversupplied and facing the headwind of reduced demand growth due to the transition to clean energy. This suggests additional downward pressure on long-term oil prices.
• The U.S. defense industry remains a long-term secular theme. In addition to Venezuela, Trump has warned Colombia about the flow of cocaine, alluded to concerns with Cuba, and expressed interest in protecting protesters in Iran. The U.S. is flying drones over Mexico to track the drug cartels, and Trump has threatened to use force in Mexico against drug runners. Meanwhile, the Ukraine war continues, and China recently reiterated its desire to overtake Taiwan. All of this supports defense as a long-term investment theme.
• We note that geopolitical tensions are a constant presence (think Cold War), while stocks remain the critical element for wealth creation and maintaining portfolio purchasing power. We once again reiterate that investors remain in a portfolio consistent with their well-reasoned asset allocation.