US Special Forces moved to strike in Venezuela on Saturday in a blitz that left much of the world stunned. I had written a few weeks ago that a full-scale invasion of Venezuela seemed unlikely. I never once considered a late night Snatch-and-Grab of Maduro was a possibility. It was pretty shocking move, but fairly brilliant on Trump’s part (for now).
There is a lot of excitement around this move, and the internet is full of bad speculation and lengthy pontification about what this means, so I included all my personal notes in an effort to fit in today. Two important takeaways – China’s response is key, and the fact that this situation is not “over” with Maduro in handcuffs, it is just getting started.
Realistically, in the immediate term, this doesn’t change much for the global supply and demand situation. As more info comes to light, my opinion could change quickly, but right now – not a big shift fundamentally.
The risks I see coming from this are geopolitical. China is Venezuela’s biggest ally and beneficiary. They are put in a position where they almost have to respond.
OPEC finalized production hike pauses over the weekend as well – a move that was widely telegraphed and agreed upon at the end of November. The group cites “Seasonal Weakness” as the sticking point to continuing their production hikes through the end of March.
Why not a big mover on Global S&D:
The US (WTI), North Sea (Brent), and Saudi Arabia (Arab Light) are the world’s most used, processed and benchmarked grade of crude oils. These are Light Sweet Crude’s (more liquid, less sulpher) that have high product yields. They are used for things like gasoline, diesel, and jet-fuel.
Venezuelan crude is Extra-Heavy Sour (Merey – thick, high phosphorus, heavily pollutant) and is used for things like asphalt, Naptha, bunkering-fuel (big-boats), and plastics.
To refine Venezuelan grades, refineries need to be specifically setup and built to solely process that type of crude oil. The vast majority of heavy-oil refining (and the end-users of those fuels) are almost entirely based in China / Asia. China was already getting this oil for almost-free, and is the main party stung by this move.
Canada produces Heavy-Sour that’s refined in the US – but that trade is profitable thanks to a seamless two-way pipeline system that hooks-in Canadian producers and US refiners for seamless efficiencies between production – import – refine – export.
So you can bring Venezuelan crude here, but you can’t really refine it, yet. And if you do refine it, you don’t have much of a customer base to sell into, and for those customers, your competing on price against a highly efficient Canada – US production-refinery system.
Realistically, the economics on refining Venezuelan crude in the United States do not pencil-out. They likely will in the future, it will just take time, capital, and ingenuity.
China in Focus:
China has been the only real “buyer” of Venezuelan crude oil for some time. The refining industry in China that imports and uses this Venezuelan Crude are small independent companies referred to as “tea-pots”. Sounds like an innocent industry, it is not.
Extreme leverage, constant skirting of regulations, and massive debt-fueled speculation have driven the CCP to very publicly chastise this industry very publicly. Xi’s camp has long-feared that a blow-up in “tea pots” poses a risk to their countries economic health.
China can ill-afford another wave of industrial de-leveraging (investment capital being incinerated), and if their independent refining industry starts to crumble, thanks to US actions- it puts the Xi regime in a really tough spot.
Reputation Risk:
Outside of the economics. this is a pretty massive slap in the face to China and a big embarrassment for them on the global stage. Their weapons system they have been touting as extremely advanced and said to render the F-35 as useless, failed pretty horrendously. Taiwan’s media is running wild with the story (from what I’ve seen).
China has provided infrastructure, medicine, tech, weaponry and advanced defense systems to Venezuela for years in exchange for consistently free shipments of crude oil through a contract barter system. This has been massively profitable for China, while Maduro and Chavez felt that Chinese support was a key deterrent to any direct US military action.
We initiated this strike on Maduro right after he he finished up with a special and largely symbolic meeting between him and a special Chinese envoy sent by Xi. Chinese officials and military personnel were reportedly on the ground and in close proximity to the strikes and fighting.
The Trump admin. showed zero-pause, or any real fear of China retaliating – which is not a good look for a country that tries to bully every neighbor around the Indo-Pacific.
I would not be surprised if China were to accelerate their move away from the US Dollar while becoming more brazen and public about their plans to challenge it’s supremacy.
US military engagements and violent responses by groups within Venezuela seem probable moving forward – groups like Hezbollah, ISIS, drug cartels had an umbrella of protection under Maduro and remain in the country. There has never been a quick, clean and easy forced regime change – and this conflict is really just getting going.
Technical Analysis:
Price is flirting with the 20-Day moving average here as prices have advanced through initial resistance areas. Today will be telling as global asset managers return to markets in force. This situation is setting up to get more and more volatility, positions should be sized and protected in accordance.
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