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Venezuela: The Next Black Swan for Oil ETFs?

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With the recent reelection of Huge Chavez in Venezuela, it appeared as though the South American oil power was destined for another six years of his rule, stretching his reign over the nation to nearly two decades. However, a potent form of cancer has been afflicting the Venezuelan president for quite some time, and it forced him to seek medical treatment in Cuba once more.

The treatment hasn’t exactly been successful though, as there are swirling rumors over Chavez’s health and if he will be able to be sworn in for a new term, or if he will even survive the year. If Chavez doesn’t make it, or if he is unable to perform his presidential duties, it could create a constitutional crisis in the nation (read Do Corrupt Countries Make for Great ETFs?).

It appears as though if Chavez can’t take the oath by January 10th, it must be determined if it is a temporary issue or a permanent one by the country’s National Assembly. If permanent, a new election must take place within 30 days, although in the interim of the leader of the National Assembly assumes the Presidential duties.

However, an election for that post is still somewhat in doubt as well, and with the stakes of a possible interim presidency in the balance, there could be a bigger fight than usual for the post. This could add a new wrinkle to the issue, especially if Chavez’s former challenger, Henrique Capriles, runs for the post, meaning that there could be a big shakeup in the nation in short order.

Beyond that, there could be some infighting in Chavez’s own party in order to succeed him as president. Two of the most powerful people in the party may have their eye on the post, so we could see a fracturing of the group if the worst comes to pass for Chavez, in what could be a once in a generation opportunity for power in the country.

Why Investors Should Care

Venezuela is somewhat of an economic basket case—it arguably has one of the world’s highest inflation rates and a relatively big budget deficit-- and doesn’t really find its way into many ETFs or as a big portion of stocks’ revenues. Nationalization fears are also relatively high in the country so this has stymied investment from large multinationals in years past.

Still, the country does have one thing going for it; oil. By some estimates, the nation’s Orinoco Belt has more than half a trillion ‘technically recoverable’ barrels of oil, making it one of the largest deposits of fossil fuels in the world (see Crude Oil ETF Investing 101).

While the oil isn’t exactly of the highest grade, and much of it is locked away in harder-to-recover shale, it still represents a massive source of wealth for the nation both now and well into the future. This is especially true considering the relatively small population for Venezuela, as just over 28 million people live in the country, suggesting a massive amount of oil per capita.

In fact, the country is already exporting over 1.8 million barrels per day, putting it ahead of huge oil producers like Mexico, while its total production hits the 2.3 million barrel mark, leaving it ahead of the entire EU based on this metric.

This allows Venezuela, much like many Middle East countries, to play a bigger role on the world stage than it otherwise would if it had not been blessed with such impressive hydrocarbon reserves. Additionally, investors should remember that the oil market is very shaky thanks to a tight supply and demand balance, so any possible disruption in the flow of oil could increase the volatility in global prices for the important commodity, so political upheaval in such a key oil producer could roil markets.

How to Play

Beyond a few broad Latin America ETFs like (ILF - Free Report) , as well as some worried neighbors in Colombia ((GXG - Free Report) and ), investors should probably focus in on the commodity itself over the next few weeks. This can easily be done by looking at any of the many oil ETFs that follow crude futures (read Why Colombia ETFs May Continue to Rise).

The PowerShares DB Oil Fund (DBO - Free Report) is easily the most popular, but the iPath S&P GSCI Crude Oil Index ETN , and the United States 12 Month Oil Fund (USL - Free Report) which spreads out exposure across the futures curve are also intriguing options. Beyond that, investors have a number of leveraged ETF plays in the space including (UCO - Free Report) for long exposure and then (SCO - Free Report) for the short side of crude.

Bottom Line

ETF investors who target crude oil may be in for a rough ride over the next few weeks. Venezuela is an important player in the hydrocarbon market and it is hard to tell what their political situation will be by the end of the month.

Multiple reports suggest that Chavez will be unable to continue as president—even if he lives—so there could be a fight for the presidency and a constitutional crisis in short order. This could very easily spook the oil market but as of right now it is hard to say how things will play out (read Time to Buy the Oil Equipment ETFs?).

One thing is for certain though; this looks to be a delicate time for Venezuela, and the chance for a ‘black swan’ event taking place in the market could be higher. Investors saw some serious worries creep up on oil prices thanks to the prospect of a wider Arab Spring last year, so some sort of ‘Venezuelan Spring’ could definitely throw a wrench into oil prices too as we push further into 2013.  

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