Crude

U.S. military strikes on Venezuela that began on Friday ended with the capture of President Nicolás Maduro on Sunday. Major U.S. indices shrugged off the latest geopolitical jolt, and the Dow even rallied 600 points to a record close Monday. Instead, all eyes were on energy markets as crude prices slipped in early futures trading.

That reaction makes sense. Despite holding the world’s largest crude reserves, Venezuela produces less than one million barrels per day and exports about half of that. Years of underinvestment and sanctions have hollowed out its production capacity. Much of what is produced: extra-heavy crude that only a handful of refiners can actually use.

Analysts estimate that any shocks to supply will hardly impact oil prices. Given that the oil market is ‘trending towards oversupply,’ Rapidan Energy Group founder Bob McNally says the immediate impact is ‘almost a nothing burger.’

Oil stocks rallied anyway. Chevron ($CVX), the only major U.S. oil company still operating in Venezuela, gained 5.1% before pulling back on Tuesday. Exxon Mobil ($XOM) rallied 2.2% and ConocoPhillips ($COP) rallied 2.6% as the 10 biggest names in oil added a collective US$100B in market cap. 

The bet isn’t on higher oil prices – it’s on a rebuild. Venezuela exports most of its heavy crude because it lacks refining capacity, and rebuilding would take years. Investors are pricing in the possibility of a long, capital-intensive build-up of its energy sector.

That’s a potential windfall for oilfield services firms. Halliburton ($HAL) rallied 9% to a 52-week high, while Schlumberger ($SLB) hit a record US$44.66 as expectations grew for future drilling and infrastructure contracts.

U.S. Gulf Coast refiners like Valero Energy ($VLO) specialise in processing Venezuela’s heavy crude into gasoline and jet fuel. The firm could see even higher margins if increased supply brings down crude prices further. Several Wall Street analysts – including the most unlikely of candidates Michael Burry – say Valero has the most leverage to this shift given its capacity and configuration. $VLO rallied 10% on Monday, but paired back some gains on Tuesday.

Bottom line: oil markets are focused on oversupply, while equity investors are looking years ahead. They’re also pricing in a flawless rebuild, which assumes capital will be deployed efficiently amid a backdrop of political stability and sanctions relief. It’s a best-case scenario… and far from guaranteed.

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. The author of this article and other employees of Stakeshop Pty Ltd may hold positions or have financial interests in the company (or companies) discussed above. As always, do your own research and consider seeking financial, legal and taxation advice before investing.