Zacks Analyst Blog Highlights: Eni, Repsol, Occidental Petroleum, Marathon and Hess

Thu Feb 24, 2011 9:30am EST

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Zacks Analyst Blog Highlights: Eni, Repsol, Occidental Petroleum, Marathon and Hess

PR Newswire

CHICAGO, Feb. 24, 2011 /PRNewswire/ -- Analyst Blog features Eni (NYSE: E), Repsol (NYSE: REP), Occidental Petroleum (NYSE: OXY), Marathon (NYSE: MRO) and Hess (NYSE: HES).


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Here are highlights from Wednesday's Analyst Blog:

Middle East Turmoil & the U.S. Recovery

Tensions in the Middle East appear to have given the market an opportunity to retreat. But is it the start of a significant correction that many have long been expecting? Or is it a knee-jerk reaction to the oil spike due to the Libyan violence?

I think it's more of the latter; oil spikes have a history of getting in the way of economic stability and growth. And with Libya in the midst of a violent political struggle, concerns about oil supplies have come front and center for the first time in the ongoing Middle Eastern turmoil. It is a key OPEC member and accounts for about 2% of global oil supplies.

But as important as Libya is to the oil market, it can't by itself shift the supply situation materially. After all, OPEC is sitting on roughly three times Libya's daily oil production in excess production capacity. It is this redundant capacity within the oil cartel (most of it situated in Saudi Arabia) that gives it clout in the global oil market. As such, OPEC can easily offset Libyan supplies by opening its spigots.

Loading up on oil producers to capitalize on the commodity's upward trajectory may not be the best strategy at this stage. You will need to wait for better entry points, as the easier gains are most likely behind us. You also need to keep in mind that a number of major producers will be negatively affected by their exposure to disruptions in that country.

Many of the largest international operators in that country are from Europe. Italy's Eni (NYSE: E) and Spain's Repsol (NYSE: REP) have been forced to withdraw expatriate staff out of Libya.

Among U.S. operators, Occidental Petroleum (NYSE: OXY) was a major winner of recent leasehold auctions, but does not have much in terms of actual production there.

Marathon (NYSE: MRO) and Hess (NYSE: HES) also have Libyan exposures, but the potential production shortfall will be more than offset by gains on the commodity-price front.

The Fear Premium in Oil Prices

The jump in oil prices following the Libyan turmoil primarily reflects fears of the disturbance spreading to other major oil producers, particularly Saudi Arabia. I hate saying this, but the Saudi regime is far more stable and well entrenched than many of their regional peers.

They are masters of spreading their vast wealth around. A case in point is today's announcement of more than $35 billion in new spending measures aimed squarely at potentially disaffected segments of the Saudi society. This helps them buy loyalties, and even enduring affection. More importantly, their co-option of the powerful domestic religious authorities gives them a level of authenticity and legitimacy that the regimes in Egypt and Libya lack.

Saudi Arabia does have a weak spot in its minority Shiite population, which accounts for about 10-15% of the total population (the Saudi state professes the more fundamentalist Wahabi strain of Sunni Islam). The Saudi Shiites have historically felt marginalized, but have been emboldened by the rise to power of their co-religionists in next door Iraq following the overthrow of Saddam Hussein.

More importantly, the Saudi Shiites demographically dominate the Eastern Province, which is home to the country's major oil fields. With Shiites in the neighboring Persian Gulf state of Bahrain up in arms against their own local Sunni king, it would be reasonable to expect some disturbances in Saudi Arabia's oil-rich Eastern Province. But their ability to disrupt oil production/supplies will be limited.

Given this background, I don't expect the fear premium in oil prices to expand further. But with uncertainty hanging in the air over the region in the coming days, the premium is not expected dissipate either. The regional turmoil has brought forward the prospect of $100 oil -- more so than would have been the case purely on the basis of economic forces. This will temper the economic recovery, but is unlikely to derail it.

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