The U.S. conducted a limited operation in Caracas, capturing President Nicolás Maduro and his wife, Cilia Flores, transferring both to New York to face criminal charges. In response, Venezuela’s Supreme Court appointed Vice President Delcy Rodríguez as interim leader, and while she initially condemned the U.S. intervention – the most meaningful in Latin America since the invasion of Panama in 1989 – she has softened her tone and is now calling for cooperation. Initial reaction from China and Russia is limited but could become a complicating factor should a second phase of U.S. military involvement commence.
While heralded as an opportunity for normalization of relations with the U.S. and a political restructuring, the current government led by Rodriguez and the military power that supports it remain in place. In addition, the Machado-led opposition remains sidelined and explicitly dismissed by Washington, raising questions around what the alternative could be if further pressure is exerted by the U.S. on Rodriguez.
Energy markets are in focus as a result of this military action. While Venezuela holds the world's largest proven oil reserves, current production of roughly 0.9 million barrels per day is well below their recent peak of ~3.5 million in the late 1990s. However, given the degradation of infrastructure that has occurred under Maduro’s leadership, an increase in output is likely to take some time. With the necessary changes to operations and infrastructure, as well as access to higher levels of necessary diluents, output could rise by several hundred thousand barrels over time under constructive conditions, but not overnight. As a result, while oil prices could be pressured lower over the medium-term, we do not see a sustained short-term rise in prices as a result of this action and therefore are not adjusting our inflation expectations or global interest-rate outlook.
From an asset allocation perspective, we do not believe the events warrant any meaningful changes to our broader investment positioning. In commodities, we remain constructive on energy, even with the potential for higher Venezuelan output over time. In short, we do not recommend any changes to portfolio construction or asset allocation following this weekend’s events and would advise clients as such.