Beware of another oil supply shock-Goldman Sachs

FRANKFURT Wed Mar 2, 2011 8:32am EST

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FRANKFURT (Reuters) - Oil prices could spin out of control if markets are hit by a further supply shock similar to that caused by unrest in Libya, according to a Goldman Sachs fund manager.

Brent crude for April delivery soared 26 percent after a wave of civil unrest gripping the Middle East Northern Africa (MENA) region, starting with Tunisia in December, raised concerns about supply shortage of oil.

On Wednesday, Brent rose beyond $116 a barrel, boosted by reports of government counter-attacks on rebel-held towns in the east of Libya, the world's 12th largest oil exporter.

The International Energy Agency has said that top oil exporter Saudi Arabia is capable of covering any outage in Libyan oil production, standing at 1.6 million barrels per day (bpd).

But production disruption already threatens to make a serious dent in the less than 5 million bpd of OPEC oil that can be swiftly added to markets in times of shortage.

"If we get another supply shock, who knows where the oil price would go from here," Edward Perkin, the chief investment officer of the European equity team at Goldman Sachs Asset Management told Reuters in an interview.

"We acknowledge the uncertainty, but then times are always uncertain. The way we try to tackle it is to contemplate several paths for every stock we hold."

Perkin oversees the GS Europe Portfolio -- worth about 62 million euros ($86 million) -- which pursues a bottom-up stock picking strategy.

More than a fifth of the fund is invested in European financial stocks, including Swiss UBS, French BNP Paribas and HSBC, its top holding.

Compared with its benchmark, the MSCI Europe Index, the fund is underweight on utilities, which Perkin said were looking rather expensive in light of falling power prices and expected earnings pressure.

Asked why he saw Europe, which is far behind emerging markets in terms of growth expectations, as a valid investment case, Perkin said: "Growth projections for Europe may be modest compared with emerging markets. But companies that are listed there are not necessarily a replication of those modest fundamentals."

He added some European stocks would offer exposure to developing countries without actually investing there, pointing to commodity stocks as an example, including Anglo-American miner Rio Tinto, another top holding.

(Editing by David Cowell)

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