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Forget Syria. The oil market should be worried about Libya

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As air strikes loom over Syria and turmoil rages across the Middle East, oil is up and stocks are down. That is a predictable and understandable reaction to the uncertainty. The price of a barrel of Brent crude oil is 15 per cent higher over three months, with a sharp rise in the past few days. Investors can pick and choose between the horrors in Syria or the paralysis in Egypt. Yet the country the oil market really ought to worry about is Libya.

Syria is a marginal player in the oil market – always has been, always will. Before the civil war, it produced about 370,000 barrels of oil equivalent a day; that may have fallen to about 70,000 b/d now. Nor is it a significant transit point. A western military strike there would undoubtedly have a financial impact – Société Générale estimates that it could push the oil price up to $125 (U.S.) from about $117 on Wednesday. But that ought to be shortlived, unless there is contagion on an unprecedented scale across the region, which is unlikely.

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More troubling is Libya, which is racked by strikes and protests that have cut its daily oil production to a trickle. Its average output in August was 300,000 b/d, officials said this week. Earlier this year, Libya was boasting that it was almost back to its prewar production level of about 1.3 million b/d. But the chaos that has gripped the country since the ousting of Moammar Gadhafi in 2011 now threatens to curtail production indefinitely as factions fight for control of oil resources and revenues.

That is bad news for Eni SpA, for sure. The recovery of Libyan production lies behind the Italian group's outperformance in recent months. Repsol YPF SA and Marathon Oil Corp. also have stakes in fields there. Any prolonged breakdown of security will be a negative, though so far there has been little stock market reaction.

Investors can worry about Syria by all means, but beware more trouble out of Libya.

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