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By Jeremy Glaser | 02-24-2011 03:18 PM

What We're Watching on the Oil Front

Morningstar energy analyst Eric Chenoweth on Libya's role in the oil market, recent oil price trends, and the fear of unrest spreading in the Middle East.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With the continued unrest in North Africa and the Middle East, I thought I'd sit down with Eric Chenoweth--he is the director of energy for our equity research team here at Morningstar--to see what impact this could have on the oil markets and for U.S. investors specifically.

Eric, thanks for taking the time today.

Eric Chenoweth: Thanks for having me.

Glaser: So, I think what's on a lot of people's minds right now is probably Libya. It's the current hotspot. There is a lot of questions about their oil production, which has basically stopped. And we've seen oil prices rise pretty substantially. Could we talk a bit first about what Libya's role is in the global oil market? Are they a large player?

Chenoweth: So in Libya right now, we think, somewhere between half to three-quarters of production is offline. They produce about 1.8 million barrels a day; put that to an 88 million base on a daily basis. They export most of that. So about 1.5 million of those barrels are exported. The export market is considerably smaller, so the export market is about 20 million to 25 million barrels a day depending on global demand, so still a pretty small player even within the export market, but very important for Europe. European refineries rely a lot on their crude and also for some of their natural gas.

Glaser: So certainly it's significant, but it's not an enormous amount; it wouldn't justify some of the moves that we've seen in crude prices. What you think is driving that investor sentiment there?

Chenoweth: Well, I think it's more than just Libya and Egypt and the rest of North Africa. I think its fear of contagion. We have unrest in Bahrain, which shares a border with Saudi Arabia--Saudi Arabia being the cornerstone and the biggest player in the oil export market.

Glaser: So if this unrest moved to a country like Saudi Arabia, we really could see a significant impact on the amount of oil available for export?

Chenoweth: Absolutely.

Glaser: Now if we think about the supply/demand dynamics in the marketplace, there was rising demand for oil even before all of this happened. Do you think this has just been a perfect storm in terms of when some of this supply is coming offline?

Chenoweth: I think if we'd been experiencing this kind of supply shock a couple of years, it wouldn't have been nearly as impactful as it is now. As we moved into the back half of 2010, we started to break through some of those record demand levels that were set before the global recession in 2008, and that really put the supply-demand balance back into a spot where oil was moving up just based on those natural fundamentals, and now you layer on a supply shock and fears that there could be more supply shocks on top of that, and it leads to the environment we are in now.

Glaser: So we have, let's say, very high oil prices now, do you think that this is a permanent shock, that we're going to have to get used to these permanently higher levels? Or do you think that prices will start to drift back down to where we were before?

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