Venezuela’s Oil Revival Prospects, Geopolitical Ripple Effects, and Bond Market Rally
Key points:
Oil recovery potential under sanctions relief.
Regional geopolitical implications (alignments, elections, and security dynamics).
Positive bond market reaction to Maduro’s capture.
Venezuela’s oil industry is in poor shape. Low investment under the weight of PDVSA inefficiency and then sanctions has brought production down from 3 million barrels per day (mbpd) in the early 2000s to around 0.9mbpd last year. The most recent US-imposed shipping blockade will have brought those numbers down further. If shipping restrictions and other sanctions are lifted, allowing for the importation of needed diluents and more reliable export routes, for example, it appears that production could recover by maybe 200-250kbpd. There would be a positive pricing effect also if Venezuela no longer had to sell oil at a discount on the black market. New investment from existing players, including Chevron, could maybe add a similar amount again over a two-year time-frame. Getting back to the 3mbpd peak would appear to require not just a much more stable political environment but also around US$80bn of capital expenditure, which suggests such an outcome is at least five years away and may never materialise. We therefore see fairly muted implications near-term for the wider oil market from the weekend’s developments. We said last year how we believed that geopolitical fault lines should increasingly be considered through the prism of alignment or non-alignment with the Trump administration Maduro was clearly on the wrong side of that divide but the weekend’s developments also heighten the consequences for other leaders in the region. The most overt allies such as Milei in Argentina and Chile’s president-elect Kast have celebrated Maduro’s capture. Given the prevailing security concerns in the region, and the blame for this attributed to Venezuelan migrant gangs, we see the robust US tactics playing well with popular opinion and therefore favouring law-and-order candidates in upcoming elections, particularly in Colombia and Peru. Moderate leftists in the region such as Lula in Brazil and Sheinbaum in Mexico will express concerns around respect for international law but prioritise maintaining good relations with the White House to minimise the risk of controversial US strikes on their criminal gangs. Colombia’s President Petro is the least likely to hold his tongue but is increasingly a lame duck, and the strong institutional collaboration with US drug enforcement agencies will likely endure. In macro terms, Colombia has most to gain from a recovery of the Venezuelan economy, through exports and the potential return of migrants.
Initial market reaction:
The initial market reaction to Maduro’s rendition has been positive for bonds. Venezuela’s sovereign and PDVSA bonds have rallied 7-8pts, representing gains of 20-25%.
