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The bilateral relationship between the U.S. and Colombia has continued to worsen, with both countries recalling their top diplomats last week amid an alleged plot against Colombia’s President Gustavo Petro. Washington acted first, recalling charge d’affaires John McNamara on Thursday, with State Department spokesperson Tammy Bruce saying the move was taken “following baseless and reprehensible statements from the highest levels of the government of Colombia.” Hours later, President Petro announced he was calling home ambassador Daniel Garcia-Pena over the deteriorating relationship between the two countries. 

Previously, Petro claimed that the U.S. extreme right collaborated with drug traffickers in a coup plot against him, before later downplaying the direct involvement of the U.S. government. Washington responded by threatening to decertify Colombia, blaming Petro's left-wing administration for Colombia’s record-high coca cultivation and cocaine production. Colombia's energy and mining sectors are susceptible to direct sanctions or operational disruptions, with a decertification likely to trigger a huge selloff. Colombia is the United States’ third-largest Latin American trade partner after Mexico and Brazil, with bilateral trade between the two nations approaching $35 billion.

Interestingly, Colombian and Latin American equities have been some of the best-performing in the current year, with the Global X MSCI Colombia ETF (NYSEARCA:COLO) returning 27.9% in the year-to-date while iShares Latin America 40 ETF (NYSEARCA:ILF) has gained 25.1%, both outperforming the S&P 500 which has returned 5.7% YTD. Colombia’s state-owned oil and gas giant, Ecopetrol S.A. (NYSE:EC), is among the companies facing the highest risk amid the ongoing diplomatic tussle. 

Back in May, Ecopetrol reported a 22% drop in first quarter net profit, citing geopolitical tensions, Trump's tariff threats and a slowing economy in China. The company said it would cut its FY 2025 spending by ~$500M to $5.9B-$6.8B amid a difficult macro environment. The company relies heavily on U.S. technology and export markets, and a decertification/sanctions might restrict its ability to sell to American refiners.

Strained relations between the two countries could induce capital flight by foreign investors, forcing the company to turn to more expensive alternatives. Further, Ecopetrol has partnered with multiple U.S. energy companies, putting these deals at risk. Notably, the company has formed a joint venture with Occidental Petroleum (NYSE:OXY) in the Permian Basin as it tries to gain exposure to the shale sector. Ecopetrol also holds participation interests in various projects operated by U.S. companies including Anadarko, Repsol (OTCQX:REPPY) and Shell (NYSE:SHEL), Stone Energy, Noble Energy (NYSE:NE) and Murphy Oil (NYSE:MUR). EC stock has returned 12.2% in the year-to-date.

However, Colombia could lower its future dependence on U.S. energy markets. Whereas U.S. sanctions against Venezuela have provided a boost to its oil exports, the Petro administration's aggressive push for renewable energy could lower its reliance on traditional energy partnerships. Indeed, Ecopetrol has gone on a clean energy buying spree, buying 10 solar and wind energy projects from Norway's Statkraft in May and the Windpeshi wind power project from Enel (OTCPK:ENLAY) in July.

Colombia’s coal sector could face similar headwinds. In 2022, Colombia was the largest source of U.S. coal imports, accounting for 64% of the total, or approximately 4.04 million short tons. The U.S. imports steam coal for electricity generation, and metallurgical coal for steel production. In 2022, steam coal accounted for three-quarters of total U.S. coal imports. However, environmental pressures coupled with cheaper U.S. natural gas have been weakening demand for Colombia’s coal with the Biden administration's climate policies prioritizing a reduction in fossil fuel imports. A protracted diplomatic rift between the two countries as well as Petro’s pro-renewables stance is likely to further accelerate the shift.

Colombia's mining sector is likely to start feeling the heat, too. Publicly-traded companies like Mineros de Colombia (TSX:MSA:CA) and Colmetal rely on U.S. demand for minerals like coal, nickel and gold. Mineros shares have been flying, gaining 70.8% YTD as the company continues to expand gold production aggressively. 

Gold prices have jumped nearly 40% over the past year to $3,310 per ounce on Monday, close to an all-time high. Gold prices are rallying due to a combination of factors, including increased geopolitical tensions, economic uncertainty, and expectations of lower interest rates. These factors are driving investors towards safe-haven assets like gold, pushing prices higher.

By Alex Kimani for Oilprice.com