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

U.S. oil output, aided by capital markets, is looking resilient.

OPEC shale
An Ecopetrol oil refinery in Cartagena. Colombia. Ecopetrol last week cut its projection for oil and natural-gas output in 2020 by more than 400,000 barrels of oil equivalent a day, giving support to oil bulls. PHOTO: PAUL SMITH/BLOOMBERG NEWS

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 forcorruption 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.

The Original Posted by Liam Denning /The Wall Street Journal