Why have oil prices not surged after Venezuela strikes?

Often oil prices go up when there is conflict in the world, particularly if there is a risk of some disruption to global supply.

So, you might have expected the Trump administration’s move to oust Venezuelan president Nicolás Maduro to have prompted a spike in crude.

However, prices were actually down modestly as traders had their first opportunity to react to the news before rising slightly. If you hadn’t been following the developments from Latin America, then you would have had little idea that a country holding around 17% of global proven oil reserves (according to the US Energy Information Administration) had just seen a major incursion.

What is behind the muted move in oil?

There are several factors which help explain the reaction. While it has significant reserves, Venezuela contributes less than 1% of the world’s oil output and produces around a third of what it did 10 years ago, in part thanks to sanctions from Washington and a naval blockade as well as an extended period of underinvestment.  

In addition, Venezuela’s oil is ‘heavy’ making it harder to refine but useful for making diesel and asphalt.

Plus, there are expectations that, in the longer-term, this US intervention could result in a potentially significant increase in Venezuela’s crude production.

President Trump’s comments in the wake of the Venezuelan strikes suggest US oil companies will be at the forefront of revitalising the country’s oil industry. As the table shows, this has led to a significant increase in the share price of US-listed oil companies.  

This includes producers of oil but also companies involved in the provision of services to the industry like Schlumberger and Haliburton as well as refining companies.

How have financial markets reacted more widely?

While oil prices have barely flickered on the Venezuelan news and equity markets made further progress, gains for precious metals suggest at least some investors are seeking out traditional safe havens in the wake of the heightened geopolitical uncertainty. Gold and silver prices are both close to their recently attained record levels. Defence stocks were also in demand, European names BAE Systems and Rheinmetall among them.