With a post-Maduro Venezuela, what now for oil bonds?

The recent U.S. intervention in Venezuela has raised major questions in the oil market. With the future governance of the country still largely uncertain, will more Venezuelan oil eventually come online? If so, how long will that take, who will manage the process and how will these dynamics affect short- and long-term oil prices? More specifically, what impact will these factors have on oil bonds across the delivery chain?

At about 300 billion barrels, Venezuela’s proven oil reserves are the largest on earth. For reference, its oil production peaked at about 3.5 million barrels per day (BPD) in the late 1990s before sliding to about 900,000 BPD today. Although its delivery chain infrastructure now appears to be in very poor shape, we think it’s likely that an additional few hundred thousand BPD of Venezuelan oil will come to market over the next several months. If the country eventually benefits from sanctions relief, the return of diluent supply¹, pipeline repairs and power restoration, this figure may increase to 300,000 to 500,000 BPD over the next 12 to 18 months.

However, adding more than one million BPD of new production may take years and tens of billions of dollars in new investments in infrastructure and other aspects of the delivery chain. This tension between the likely short- and long-term outcomes in Venezuela may account for why West Texas Intermediate (WTI) crude oil prices didn’t move significantly in the immediate aftermath of the U.S. raid to capture former president Nicolas Maduro and his wife on January 3.

¹Diluent supply refers to the procurement and delivery of light hydrocarbons – typically natural gas condensate or naphtha – used to reduce the viscosity of heavy crude oil (bitumen). This process, essential for transporting thick, heavy oil via pipelines or rail, ensures the fluid can move efficiently.

The oil sector may experience near-term weakness due to oversupply

Given the dynamics above and other critical factors in the oil market, we have a split view of oil prices over the short and long term. Over the short term (i.e., the next nine months or so), we expect prices to fall for a number of reasons. First, OPEC has begun to release oil to the market after more than two years of withholding supplies. Second, production by non-OPEC producers like Guyana and Brazil reaccelerated by more than one million BPD in 2025, with some production growth expected to carry over into 2026. This has pushed crude and liquid inventories among The Organization for Economic Cooperation and Development (OECD) countries above their five-year average and led to a generally oversupplied market.

As such, an increase in Venezuelan production would add to this oversupply. Other downside risks to oil prices include an increase in U.S. unemployment that triggers a decline in oil consumption and/or a durable resolution of the Russia/Ukraine war. Such a resolution would likely result in the lifting of at least some sanctions against Russia and an eventual increase in oil flows.

We’re mindful that geopolitical factors could also push oil prices somewhat higher over the short to medium term. For example, continued U.S. military action against Russia’s “shadow fleet” could limit global supplies, as could significant U.S. or Israeli military action against Iran if these operations affect Iranian oilfields or ports. Meanwhile, regime change in Iran could in theory limit the country’s ability to maintain its current level of oil exports. And while Chinese demand for oil has broadly decreased over the past few years, the Chinese government has continued to stockpile oil on a seasonally consistent basis, thereby supporting oil prices.

Still, we believe that any geopolitical price spikes will likely prove to be temporary unless unforeseen events disrupt oil supplies for a substantial period of time. With all that said, we see short-term oil prices in the $55 to $60 range for WTI crude.

The longer-term picture for oil looks more promising

We expect near-term oversupply to abate as resilient global economic growth supports oil demand and as OPEC’s spare capacity decreases. At the same time, we see non-OPEC production growth tapering off by 2027 as new supply eases and production declines elsewhere start to bite. We anticipate that exploration and production companies will remain disciplined in their capital allocations and we expect that they’ll favor free cash flow generation over investing heavily in capital expenditures, especially in terms of new projects. We also anticipate that they’ll focus on balance sheet strength and returning capital to their shareholders. As oil supplies potentially decline toward the end of 2026, we’re more constructive on prices going into 2027 and 2028. Accordingly, we expect that oil-related credits will benefit from a more benign macro environment.

Investing selectively as we seek attractive entry points

Against the backdrop above, and given tight valuations in cyclical energy credits, we’re currently underweight energy-related investment-grade (IG) bonds relative to the Bloomberg U.S. Corporate Bond Index. While energy credits comprised about 7% of the index as of December 31, 2025, our IG portfolios maintained about a 2% weighting on average. In our view, the near-term balance of risks is tilted to the downside, with little margin of safety embedded in energy credit spreads. As such, we favor investing in IG energy credits that can weather a period of lower oil prices. These companies tend to have low oil price breakeven rates, integrated operations and strong balance sheets. Within high yield, we favor oilfield service companies given their recent recapitalization and greater market concentration.

The technical backdrop for corporate credit remains supportive. We expect oil-related IG primary issuance to be somewhat elevated in 2026, driven primarily by midstream companies. While we anticipate that primary issuance will be more muted in high yield, we don’t expect the primary calendar to be a significant driver of high-yield spreads. In our experience, broad supply/demand momentum within the oil market tends to affect high-yield prices more strongly than factors such as primary bond issuance.

Amid uncertainty, we’re staying patient and nimble

Given the complexity of the factors impacting the oil market, we’re taking a patient approach to investing in the sector. We remain positioned to capitalize on investment opportunities quickly should valuations become more attractive. The oil market is impacted by macroeconomic, geopolitical and sector-specific factors that can pose unexpected risks to supply and demand – especially as developments in global hot spots like Venezuela, Iran and Ukraine remain highly fluid. On that basis, while we’re confident in our assessment of the market’s short- and long-term fundamentals, we’re mindful of the need to remain flexible and to adjust our portfolios’ positioning as conditions warrant.