Libya Oil Export Cut Could Benefit Brent Crude Producers

There's been a lot of news related to Libyan oil production lately, and all of it bad. A nation that once produced between 1.4 and 1.6 million barrels of oil per day has seen unrest drive that down to about 200,000 per day.The Libyan central bank reported losses of $30 billion over the past 10 months.

Those who thought it couldn't get worse were wrong. Two weeks ago, former Libyan General Khalifa Hifter and his self-proclaimed National Army launched a coup d'etat, seizing parliament and challenging militias backing the political Islamist leadership to a fight. The result is predictable -- and it's civil war.

If even that wasn't enough to sour you on Libya (and it should be), the state-run National Oil Company warned late last week that it is going to have to reroute crude oil from its offshore platforms, where materially all of that 200,000 remaining production comes from, to domestic refineries. This could mean oil exports would be halted entirely.

Who this hurts
Just a stone's throw away from southern Europe, Libya's oil production has long been benchmarked to Brent Crude. Recent exports have been going to southern European refineries, with Italy and France being the big markets.

That makes sense, because the biggest foreign interest in Libyan oil production by far is Eni S.p.A. (NYSE: E  ) , the Italian oil giant. It has been a player in Libyan oil since the Gaddafi era, and was quick to secure contracts with the new government after the revolution.

The company has put a lot of money into Libya, but it isn't getting much out these days, and while Eni is large enough to weather this storm, the people who've been driving up the price of Eni recently hoping for a payoff when Libya stabilizes could find themselves waiting a very long time.

More than Eni, though, the big losers in all of this are European customers, who will find more upward pressure on oil prices on supply concerns. With Syria similarly out of commission and violence reaching the northern Iraqi oil hub of Mosul, there's not much hope of the Middle East bailing them out.

Where Europe will get its oil
The short answer for who is going to have to pick up the slack is Europe itself, with certain European oil majors better positioned than others to provide it.

The big candidates for that endeavor include Royal Dutch Shell (NYSE: RDS-A  ) and Statoil (NYSE: STO  ) , both of which are trading near 52-week highs and should be expected to continue performing well. Royal Dutch Shell pays a somewhat higher dividend, at 4.7%, to Statoil's 3.7%.

But I'd argue Statoil has more upside as it enjoys better margins, $25 billion in cash on hand that will provide it more flexibility, and a low P/E ratio floating around 10. Statoil also has much of its production in the North Sea, one of the most stable places on the planet.

The other option for European nations looking to import oil is Russia, and while there's still considerable tension over the annexation of Crimea, recent negotiations between Russia and Ukraine's incoming Poroshenko government could potentially stabilize the EU-Russia relationship, and open that market up as an export source.

The best way to invest in Russian oil would be OAO Lukoil (NASDAQOTH: LUKOY  ) , which at a P/E ratio of 6.5 is an absolute bargain. It's already recovered some from its bottom at the peak of the Ukraine mess, but is still well below its highs from late 2013. There's plenty of room on the upside here, and like Statoil, OAO Lukoil's production is primarily in a stable political environment (western Siberia).

Going forward expect the European oil market to focus more on production in stable areas, and expect those producers like Statoil to start commanding a stability premium. The area surrounding Europe is a real mess, and that energy demand has to be filled somewhere.

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