The surprise US military incursion into Venezuela on Saturday to capture President Nicolas Maduro would have usually sent shockwaves through the market. But, because the event occurred on a weekend, traders had some time to digest the implications. While the situation remains evolving, markets are adopting a more cautious, measured approach.

It was normal to expect a certain amount of “return to sobriety” on the first Monday after the holidays. Typically, markets experience exuberance towards the end of the year, with large market-makers away from their desks. Now that normal trading is resuming and there are a few important risk events later in the week (US NFP chief among them), markets might focus more on the medium- to long-term implications rather than the immediate reaction.
 

Impact on Oil and Beyond

The first consideration for forex traders regarding the situation in Venezuela is how it will affect crude oil prices and the currencies most affected by oil. The South American nation has the world’s largest petroleum reserves, at 303 billion barrels. However, due to sanctions, Venezuela is producing around 800-900 thousand barrels per day, less than 1% of the world’s total supply. At least, officially. The White House has accused Caracas of selling substantial amounts of oil illicitly. State-run producer PDVSA said that its installations were unaffected by the military operation.

Also affecting oil prices was the OPEC+ meeting over the weekend. The oil cartel expressed concerns about price stability after crude oil prices fell by around 18% over the last year, the largest decline since 2020. As a result, OPEC+ decided to keep production targets at the current level. The initial reaction in crude prices when the market opened was a slight bump higher, but then a reversal to trade lower through the start of Monday. This leaves markets considering what will happen in the medium- to long-term and effects beyond crude.
 

Geopolitics Again in Focus

Markets started the week with some dissonance. Equities continued to rise, with most global indices in the green, indicating a risk-on attitude. However, this contrasts with the geopolitical situation, which has induced support for traditional safe havens, with the dollar and gold stronger in early Monday trading.

Pundits and analysts are debating what the US’s move in Venezuela means for the global order. While many countries do not recognize Maduro as a legitimate President, given widespread accusations of fraud in the last election, he was the de facto leader of the government. Some question what it means for other US geopolitical interests, such as Trump’s repeated interest in Greenland.
 

What Happens Now?

While the debate continues, markets are likely to stick to the data and proceed with caution. Attention returns to oil, after the US essentially left the rest of the government intact, recognizing Vice President Delcy Rodriguez. Unlike other high-ranking Venezuelan officials, she is not under sanctions, which has raised speculation that the US could ease back on sanctions and allow increased crude production from Venezuela.

With oil traders already concerned about a supply glut, the increased production could exert further downward pressure on petroleum prices. Venezuela used to produce more than three times what it does currently. Still, analysts estimate that it would take years and substantial investment to rebuild the infrastructure necessary to return to that level of production.

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