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Welcome back to our first Brief of 2026 and for those still fortunate enough to be on holidays, we hope you enjoy the rest of your break. Although the workplace tends to slow down over the Christmas/New Year period, world events have a habit of encroaching on our festive season. The start of 2026 proved to be no exception. Of course, the biggest event has been the U.S. operation in Venezuela resulting in the capture and extradition of its President, Nicolas Maduro and his wife, Cilia Flores, to face charges in the U.S. on drug trafficking.
The U.S. operation, although months in the planning, took the world by surprise, including the U.S. Congress. The Trump Administration has since followed up with threats to other neighbours, notably Colombia, Cuba and Mexico, as well as increasing the rhetoric around a U.S. annexation of Greenland, including the possibility of the use of force. The events since the 3rd January Venezuela operation are eliciting pushback in Congress, where the Senate has passed a resolution that requires any further military operations against Venezuela to have Congressional authorisation. However, the resolution is largely symbolic as it is unlikely to pass the House of Representatives, and in any case, can ultimately be vetoed by President Trump, which in turn would require a two-thirds Senate majority to override.
Turmoil from international events was added to by domestic ruction as a U.S. ICE agent in Minneapolis shot and killed a woman in what appears to be an extreme response to a minor incident. Welcome to 2026.
Back to Venezuela, the Trump Administration appears to have three main motives for their actions. First, and the official motive, to arrest the trafficking of drugs to the U.S. The remaining two are not official motives, but have been expressed in press conferences and other public speaking engagements by President Trump. The second is the control of Venezuelan oil by the U.S. And third, is the U.S. exercising its “right” to control the geopolitics of the Western Hemisphere in a Trumpian version of the Monroe Doctrine, now commonly referred to as the “Donroe” Doctrine.
In terms of oil, Venezuela has the world’s largest proven oil reserves. However, it has a rocky past with the industry being nationalised by successive Venezuelan governments, with assets expropriated from predominately U.S. oil companies. In addition, under the Socialist governments of Presidents Chavez and Maduro, Venezuela has partnered with Chinese oil companies and China is the largest customer for Venezuelan oil. Consequently, the U.S. operation potentially frees up Venezuelan oil and checks China’s increasing influence in the country and the region.
To date, markets have remained sanguine in the face of recent events. Oil prices and the yield on 2-year Treasuries are largely unchanged since January 3rd, while the 10-year U.S. Government bond yield is down by just 3 basis points. In U.S. equity markets, the S&P 500 is up by 1%, just shy of its midweek all-time high, while the USD has rallied against its major trading partners’ currencies by around ½%. So much for heightened geopolitical risk. Is the market underestimating the impact of events in Venezuela? Oxford Economics reports upside scenarios in the case where the Venezuelan government aligns with U.S. interests facilitating the return of international investment in its oil industry.
In this scenario, Venezuelan oil production could increase to 2.0 million barrels per day (mn bpd) at a cost of US$15 billion(bn)-US$20bn. While this magnitude of increase in Venezuelan oil production requires only a modest amount of capital expenditure, it is a mere drop-in-the-bucket in the world’s oil supply, which is currently running at around 100mn bpd. However, Oxford Economics reports that it would cost an order of magnitude more to raise oil production to its late 1990’s peak of around 3.3mn bpd, with capital expenditure estimates of around US$100bn.
Potential downside scenarios are also unlikely to have a large effect on the global oil market, even in the significant downside scenario in which the Venezuelan government does not cooperate with the U.S. In this scenario, the U.S. institutes an even tighter and longer blockade on Venezuelan oil exports, reducing output to around 05mn bpd, similar to the low point in production in 2020.
However, even in this scenario Venezuela’s ability to seriously effect global oil markets is limited by its low share of global supply and the current glut in oil supply. Hence, from the viewpoint of the impact on global oil markets, it is likely that the market is currently guessing correctly that the impact is likely to be marginal.
The same is not likely to be the case for the geopolitical ramifications. As we wrote in an earlier Brief (A new world order: The Trumpian vision), we have a clear indication from events in Venezuela, rhetoric on Greenland and the National Security Strategy, that U.S. foreign policy sees the world as divided into blocs. The U.S. will have hegemony over the Western Hemisphere, whilst China’s potential hegemony in the East is contained by a coalition of the US and allies that are dependent on the U.S for security (this includes Australia). Europe will be left to be fought over by Russia and the Europeans.
If and how this scenario plays out is uncertain and is the topic for a future Brief. What we do know is that this would be a world order where the “rules” of the last 35 years no longer apply to international relations, economies and financial markets. Therefore, we cannot assume, for instance, that simple platitudes such as “diversification” will adequately prepare or protect us from a new world disorder.
