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Market repercussions from the Middle East and North Africa.

March 23, 2011
Tobias Levkovich, Chief US Equity Strategist, Citi

As the political transformation process in the Middle East and North Africa (MENA) gained steam throughout February, investors' concerns about oil supply disruptions caused a 10% jump in crude oil prices in only a few days along with a concurrent pullback in US equity markets. Although analysts have been trying to assuage investor fears over oil shortages, noting the rural location of Egyptian oil fields and the limited impact of Libyan oil supply disruptions, it was not until the tragic events in Japan that oil prices eased back due to decreased demand and concerns about economic growth worldwide.

As Citi research has pointed out in recent notes, approximately 3.3 million barrels/day (mbd) of total production are exported to global markets from alleged high risk regions within MENA, which can easily be replaced by OPEC's spare capacity of 5.2mbd, 3.5mbd of which come from Saudi Arabia. Unless there is a significant escalation of unrest in Saudi Arabia, investors' concerns about oil supply seem overdone. While a range of companies within the US Energy sector have exposure to high risk regions in MENA, it is our opinion that, for the most part, higher oil prices will more than make up for either the shortfall in production or the risk of operating in these countries.

As the Middle East has also been a hotbed of construction in recent years, there has been concern for US Industrials with exposure to the region. This has been reflected in an almost 6% decline in the Capital Goods industry group since mid-February. We believe these concerns may overstate the risk, as sales to the MENA region remain quite small as a percent of total sales for many of these companies.

Over the past few weeks, investor focus has shifted from sovereign debt issues to margins to MENA unrest to Japan. Investors are likely to begin refocusing back on domestic economic issues as the global events seem to be priced into markets.

NOTE: This piece is adapted from a Citi North America Equity Strategy note, "MENA Repercussions," dated Mar. 17, 2011.

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