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OPEC’s Front Lines in the Shale Fields and Wall Street

OPEC’s Front Lines in the Shale Fields and Wall Street thumbnail

Oil bulls pinning their hopes on tumbleweeds in East Texas may now be peering further south.

The argument for oil rebounding after last year’s crash rests largely on cash flow-constrained shale drillers in Texas and other states downing tools. The roughly 30% rally since mid-March in front-month oil futures, to almost $60 a barrel, has mirrored a falling rig count.

To date, though, actual U.S. oil output doesn’t appear to have dropped markedly. Indeed, the latest Energy Department estimates indicate production hitting its highest in decades. Those data are far from perfect. But alongside rig counts that have suddenly stopped falling, they suggest U.S. output is proving resilient so far.

So oil bulls ought to be cheered by news from Colombia last week. Ecopetrol, the country’s national oil champion, cut its projection for oil and natural-gas output in 2020 by more than 400,000 barrels of oil equivalent a day. Assuming 82% of that is oil—in line with output last year—that is roughly 350,000 barrels of incremental supply off the table.


That is a lot. The International Energy Agency’s medium-term projection has production from outside the Organization of the Petroleum Exporting Countries rising by 3.4 million barrels a day by 2020 compared with 2014. Ecopetrol’s retrenchment equates to roughly 10% of that.

Except that it doesn’t really. The IEA, anticipating Ecopetrol’s struggles, wasn’t banking on a Colombian gusher. Indeed, it expects the country’s oil output to fall by 150,000 barrels a day by 2020. Certainly, at less than $68, 2020 oil futures don’t indicate panic.

That isn’t to say the risk of expected barrels evaporating isn’t real. Take Brazil. The IEA sees its production rising almost 900,000 barrels a day by 2020, roughly a quarter of the projected non-OPEC increase. But Petróleo Brasileiro, accounting for about 90% of Brazil’s oil output, has become a byword for corruption and missed targets. And Petrobras, as the company is known, is due to announce new, likely reduced, guidance soon.

Scandal aside, what ails Petrobras, as well as Ecopetrol, is the need to curb spending as lower oil prices constrain cash flow and access to capital, undermining growth plans. In the IEA’s outlook, emerging markets, including such oil powerhouses as Russia, account for virtually all the cuts in forecast supply relative to last year’s outlook.

On the flip side, capital markets have remained open to U.S. exploration and production companies. The current pace of financing activity implies, when annualized, the sector raising the most debt this year since 2012, when oil averaged $94, and the most equity in at least 20 years, according to data provider Dealogic.

So while there are plenty of wild cards, both negative and positive, in places like Colombia, Brazil—and Iran, Iraq and others—the U.S. remains the central story on oil supply. For OPEC, which meets this week, competition with U.S. producers enabled by capital markets must continue to be a major concern. The need to maintain market share suggests the cartel won’t shift its stance much.

Given that oil flirting with just $60 a barrel has been enough to slow the apparent pace of retrenchment in the shale patch, the fight isn’t over by a long shot.


17 Comments on "OPEC’s Front Lines in the Shale Fields and Wall Street"

  1. rockman on Sun, 31st May 2015 7:06 pm 

    “To date, though, actual U.S. oil output doesn’t appear to have dropped markedly.”

    Lag time…blah…blah…blah.

    Also: I wonder how satisfied the KSA must be giving up about $10 BILLION PER MONTH in revenue thanks to the lower oil price. Must make them a tad nervousness to see US production still holding. OTOH maybe they have some smart consultants explaining the time lag. So maybe they’ll eventually see the benefit of losing about $1 TRILLION in revenue as US production stalls late this year. Then it’s just a question of how long they are willing to suffer the revenue loss given the US shales will possibly again be the hot play once prices get back to $90+/bbl.

    Gotta make you wonder if this really was the KSA plan, doesn’t it.

  2. Ted Wilson on Sun, 31st May 2015 8:02 pm 

    Ecopetrol is planning to introduce EM15 which contains 5% Ethanol and 10% Methanol in their gasoline pool. Many countries are moving to biofuels while US is struggling to catch up with even E15.

  3. Ted Wilson on Sun, 31st May 2015 8:04 pm 

    Just a few years ago, OPEC said that $130/barrel is the next stop in their Oil price. How come they brought it down to $60/barrel.

    The alternative fuel vehicles and the rapidly increasing share of Solar and Wind power is threatening their monopoly.

    If we can keep cutting down the oil consumption, then OPEC will struggle to maintain their economies on Oil and will start moving to other avenues.

  4. GregT on Sun, 31st May 2015 8:21 pm 

    Biofuels, solar, and wind aren’t cutting down oil consumption Ted, they are contributing to continued growth in energy usage.

  5. Nony on Mon, 1st Jun 2015 5:09 am 

    Rock is right (here).

    1. Lag time

    2. SA is not trying to hurt anyone because they know shale will turn off/on very easily just based on price. They are going to sell their oil first and then let the market decide the price. And they would gladly collude to lower prices if they thought it sustainable. they don’t. so they will just undersell anyone. that’s just supply and demand.


    But there are important insights about how shale turns on/off. All this kerflutter about the economics being a bubble at 100+ was silly. those wells got drilled for a reason. And at 100, the turn on again and the rigs get unstacked. And shale arguabley kept us away from 150+, the last several years by just being there at all. Amazing.

  6. Davy on Mon, 1st Jun 2015 6:05 am 

    Greg, exactly, if we look at China all renewables have done is be absorbed into the ongoing growth. There has been no aggregate reduction in fossil fuels because of renewables. In most cases globally reductions in fossil fuels are a response to dropping growth not renewables growth.

    At 5% market penetration renewables are a marginal player and will never come close to replacing fossil fuels and maintaining the status quo. This is especially true now that we are entering an economic descent. Biofuels have hit their glass ceiling. We just don’t have the amount of land needed to make a significant dent in fossil fuel usage. The aggregate eroi problem will not make the situation any better if more were used. Then we have the issues of production requirements of soil, water, and energy. We have decreasing food productivity as the world adds 80MIL people a year.

    Ted and Mike on this board are as bad as the NOo’s with their delusional hopium of all these problems being solved by markets and existing technology. In some case it is future technology or energy production potential that is not even in use yet. The only solution to our predicaments is less with less. That is a nonstarter for the cornucopians whether the brown’s like the NOo or the green’s like Ted and Mike.

  7. GregT on Mon, 1st Jun 2015 9:43 am 

    “so they will just undersell anyone. that’s just supply and demand.”

    Not when bringing to market a finite resource Nony. That’s just plain stupidity. Unless there is different agenda, other than profit.

  8. Nony on Mon, 1st Jun 2015 10:03 am 

    Greg, you don’t even know what you’re arguing with. It’s OK to debate who will win the World Series, but if you say don’t count out the Dallas Cowboys, it’s not even relevant. Stop flailing around and assuming you even know the terms of reference. Regroup, read, think. this isn’t even about you being wrong or right, but about if you are even addressing the question at hand.

  9. GregT on Mon, 1st Jun 2015 11:43 am 


    It is you that fails to understand what you are arguing about. You are focussed on your bet on who will win the world series, while the stadium that it is being played in burns to the ground, and you are more concerned with the predictions of how long the fire will burn, then the obvious outcome.

    You are a fool Nony.

  10. shortonoil on Mon, 1st Jun 2015 2:45 pm 

    At $60/ barrel many are asking why shale is still even in business. As we have been saying any hydrocarbon that is not energy positive can’t be economically positive if used as a fuel. Shale is definitely not energy positive; the average well reaches the “dead state” in about 10 months. The shale industry over the last six years has acquired over $1 trillion in debt on $360 billion in annual gross sales. It is obviously not a profitable business.

    Even the WSJ is beginning to note that something strange is going on with shale. Of course they are blaming the FED for flooding the economy with lots of cheap money. That is certainly part of the problem, but there are others who have a vested interest in keeping shale alive. The refinery industry saves $270 billion per year on raw material costs because of lower crude prices. If they are assuming that shale is the primary reason for lower crude prices it would certainly be to their benefit to finance it.

    We believe that there are other, much more basic reasons for the decline in crude prices. Shale, is and of itself, certainly too small a volume to have a 40% impact on prices. It accounts for less than 3% of world production. Production has been increasing by an average of 2.5% per year for the last half century. It took shale six years to be supplying an amount that was equal to the the world increase every year in prior years. Crude prices were going down anyway, as we predicted a year ago:

    Shale will keep plugging along as long as the FED keeps policy loose, and as long as there are others with deep pockets who benefit from it. As far as betting on prices re-escalating, they are howling at the moon.

  11. Apneaman on Mon, 1st Jun 2015 3:41 pm 

    Oil Money: Too Dumb to Fail

    “They sold all the stock they could sell, and issued all the bonds, and borrowed all they could, and then issued junk bonds until that market seized up, until it seemd they had nowhere left to go but down. But we underestimated the incredible dumbness of dumb money.

    In the words of the Wall Street Journal (which will never use the words dumb and money in the same phrase), “banks, private-equity firms and institutional investors have continued to pour money into the sector even as oil companies slashed billions of dollars in spending from their budgets and laid off more than 100,000 workers.”

    They’re buying stock! In fracking companies! $16.69 billion worth just in the first quarter of 2015! And they’re secondary equities!”

  12. shortonoil on Mon, 1st Jun 2015 5:06 pm 

    “They’re buying stock! In fracking companies! $16.69 billion worth just in the first quarter of 2015! And they’re secondary equities!”

    It is very easy to show that with $1 trillion in debt, and $360 in annual gross sales the industry would never to able to pay back its debt with a 10% profit margin on sales, if interest rates were 3.6% per year. In other words, its is mathematically impossible for them to repay what they have borrowed. Like I previously mentioned, there is something very strange going on with shale???? Someone keeps pouring money into a scheme where they know they will never be repaid. Someone is pouring $10’s of billions down a rat hole! Interesting.

  13. Northwest Resident on Mon, 1st Jun 2015 5:19 pm 

    shortonoil — I suspect that is all newly printed, hot off the press digital bucks pouring down that rat hole in a last ditch desperate attempt to keep the illusion of “all is well” alive and kicking for a little longer — or, until they’re ready to drop the curtain on this “mummer’s farce” that is called “the market”.

  14. shortonoil on Mon, 1st Jun 2015 6:13 pm 

    “shortonoil — I suspect that is all newly printed, hot off the press digital bucks pouring down that rat hole in a last ditch desperate attempt to keep the illusion of “all is well” alive and kicking for a little longer —”

    What ever the FED does it does for the benefit of the FED. It is a private bank, with stockholders. It has owners, and they are not Joe and Mary SixPack. If this is all about kicking some can a few more feet, you can be sure that its not going to be Joe and Mary’s can.

  15. nubs on Wed, 3rd Jun 2015 12:00 am 

    “Someone keeps pouring money into a scheme where they know they will never be repaid. Someone is pouring $10’s of billions down a rat hole! Interesting.”

    Exchange traded funds (ETFs) probably hold a lot of shale oil junk bonds & stock. Their managers know that the end will come, but in the short term they’re just playing the market, hoping to get out in time. Someone recently used the “dancing by the exit” analogy. Cute.

    And besides, it’s their clients’ money.

    Things may change very fast if the central banks decide to raise interest rates.

  16. Davy on Wed, 3rd Jun 2015 6:48 am 

    Nubs, it is more “dancing by the cliff” than an exit. There is no exit from this financial predicament. This is the end game. The situation has gotten too extreme with nowhere to go because the system is now global and interwoven. When the big boys try to exit the whole house of cards will fall

  17. nubs on Wed, 3rd Jun 2015 12:48 pm 

    Davy, I agree that the cliff looms. I suspect that those who put their money in junk bond ETFs are desperate for the high yield and hope that when they smell smoke they will be fast enough to make a quick exit before the club burns down. A lot of them are just following the advice of their financial advisors, many of whom have been pushing junk ETFs for the last decade.

    I smell smoke, but the fire department is all dancing in the club, so the whole town’s gonna burn down.

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