Chavez's Empty Threats

Over the weekend Exxon Mobil succeeded in getting a British Court to freeze assets that were seized last year by Venezuela’s state-run oil company. Monday morning, Venezuelan “President” Hugo Chavez vowed to cut off oil supply to the US if the British Court injunction of $12 billion in assets holds up.

Oil prices spiked more than 4% on the news. So what does this mean? What will happen? How do you play it, if at all?

First, is Chavez for real? Will he cut off oil to the US? Ah, that would be a no, he won’t. It’s simple really. Dictators need stability in order to remain in power. For Chavez, this is especially true. In last year’s elections, he was soundly rejected in an attempt to get himself elected ”president for life.” The income derived from oil and other natural resources is paramount to Chavez maintaining control. This guy is nothing but a podium-pounding blowhard, and he is less than nothing without our money for his oil.

So why did oil go up? Why does oil always go up? Because there is no shortage of speculative dollars waiting to pounce on situations like this one. But there is no imminent return to oil over $100. So I would just leave it alone.

And what if the worst happened, and Chavez did cut off oil to the US? There would certainly be a very short term shock– maybe at most a month of oil being 20% higher– then a quick return to normalcy. Does Chavez really think the rest of the world would not step in and increase production to fill the gap? Of course they would. Within hours. And speculators might move in and make some quick money, but not likely the average investor.

Exxon (XOM) is another story. For nearly a year it has been trading in a channel between the high $70s and $95. It hits the $95 mark and immediately falls off. But it never goes lower than the high $70s, and most of the time, no lower than the low $80s. As the price currently stands, there is about $14 of upside in the channel, and should it drop below $79 and stay (a sell signal), a downside of about $3. This in a company that is incredibly profitable (XOM just reported the single most profitable quarter in the history of the stock market) and a company that is buying back literally billions of dollars in shares every quarter. For the short term and the long term, Exxon looks like a good play.

Disclosure: As of publication I have no positions in the stocks mentioned here.

Comments

[User 142738:]

I would like to congratulate you on finally saying what we're all thinking. After all, this guy's calling for the death of the U.S. dollar, but pegs his currency (with no backing by reserves) with the greenback!

2008 Feb 12 10:19 AM

[mixter:]

Chavez is an idiot, just like the "dim-wit-o-crat" candidates running for president. They know nothing about exploration, production, refining, or distributing petroleum products. They can beat the horse to death, and then try to make him run after he is dead, but in the long run, they will have succeeded in proving that they are stupid, "know nothings"!

Economics can not be used to influence social policy when the commodity in question is in short supply in one region, but available elsewhere. Eventually, there will be real shortages that have been caused by political and misguided environmental policies, and then we will all suffer as a consequence.

2008 Feb 12 12:29 PM

[Thomas Smic...:]

Chavez's twisted social justice rants and economic policies would place him in the mainstream of the Democratic Party.

2008 Feb 12 04:21 PM

[thinkaboutit:]

OK, the outcome of the article is that Chavez iis bluffing, and yes it would seem so. However it is worth noting a couple of points - firstly Chavez is not a dictator, and secondy the reform was a suite of some 41 changes to the constitution, one of which pertained to possibility of re-election and a longer mandate.

I am not one to sing Chavez' praises, and am unsure if the article was tongue-in-cheek. My point is that if you're going to talk geopolitics you should look pragmatically at context. There is common misunderstanding and ignorance of the situation in Venezuela and South America in general, and the US plans for and intervention in that region.

Now as for snapping our fingers and have the rest of the world step in and increase production.....easier said.

2008 Feb 13 09:34 AM

[kkin365:]

Well, Chavez has acted. The ball is now in XOM's court. What next? We'll see. Warren Buffet has also called the dollar to be "worthless" in a few years (or, as he later corrected, "worth less"; so, what is new?

2008 Feb 13 09:57 AM

[Canuck Inve...:]

While Chavez won't cut off supply to the U.S., there's currently no worldwide oil surplus to replace Venezuelan production.

2008 Feb 16 06:47 PM