News Blog – U.S. Shale Oil and Its Impact on Long Term Stability in the Oil Market

by Lina Nagell

U.S. shale oil and its impact on long term stability in the oil market.

The 2012 U.S. shale oil revolution is, together with producing countries’ decision to curtail production and fight for market share, deemed the major reason for the drops in oil prices seen since 2014. Since then, the debate as to when and to what extent the oil price will rise, has been raging. An interesting topic, however, and indeed the one chosen for this blog post, is how the commercialisation of shale oil technology could decrease long-term price volatility in the, so often erratic, oil market.

Something old, something new, something borrowed, something blue?
Technological improvements – made possible through an astronomical oil price leading up to the U.S. shale oil revolution in 2012 – such as hydraulic fracturing, horizontal drilling, cost and resource optimization and a better hit ratio, has led to the major increases in U.S. shale oil production. This is not new technology, but their usage, and increased productivity, is a result of high oil prices – making the investment and subsequent usage economically viable.

High oil prices leading to innovation and new ways of extracting oil, is nothing new. During the oil shocks of the 1970’s, North Sea oil was given the opportunity to thrive, amidst high oil prices leading to investment. The Oil market’s development, with its ups and downs, has been cyclical. There is however, something new about the U.S. shale oil revolution, and it is all about the technology.

Got Time?

The oil market has traditionally been characterised by price volatility, be it high or low price levels, as a result of time lags present between point of investment, production and deliverance. With U.S. shale oil producers able to drill wells within a time frame of two weeks, one could argue that we are heading for a more stable oil market, with decreased price volatility and a market more able to respond quickly in response to demand and supply.

Though a market driven by the fundamentals of supply and demand, time lags and unpredictability in the oil markets has led to the financialisation of the market, and hedging for risk through futures, forwards, swaps and options has become a major industry. This industry could potentially decrease in a time dominated by shale oil, as the risk and time lags decrease. This development, and the possible stabilisation of the oil market, rests on one very crucial part: the survival of the shale oil industry.

Shale oil, a one hit wonder?

The shale oil industry has been struggling since the fall of the oil price, but has at the same time shown a remarkable resilience and ability to adapt to a new reality.

Pad drilling, and its ability to drill six wells from one single site, as mention in a mere two weeks whilst only three years ago it took a month, is a great example of the level of innovation and productivity increases present in the shale industry – allowing it to survive falling prices, so far. As the oil price falls, there tends to be an accompanying fall in rig counts. In the past, as pointed out by UAE newspaper The National in November of last year, the rig count has stabilised along side oil price stabilisation (on $60 in July and $41 in November of 2015), and has in fact seen horizontal rig counts start to increase.

The future of the industry is dependent on current breakeven costs, and potential increases in productivity – as well as the willingness to restart production if oil prices increase. As stated by Reuters on the 20th of January this year, breakeven costs regularly fluctuates between $40-$60 a barrel, adding that: “…fears are growing that crude’s plunge below $30 a barrel is more than just another market milestone and marks a countdown to an endgame for many shale producers that so far have braved the 18-month downturn.”

Shale may loose the battle, but will it win the war?

With Saudi Arabia and Russia’s decision to curtail production at a price level of $35 per barrel, there seems to be a willingness – albeit not a secure long-time commitment – to maintain a floor for oil prices. This floor, however, might be too low for the oil shale industry, and it might go under – for a time. With a boost in prices, following a tighter market, the oil shale industry could be back – and prices could potentially fall yet again. A long-term effect will be a stabilisation comfortable for the majority of producers. It is such a long-term effect and stabilisation, which could potentially revolutionise the oil market as we know it, for as long as shale oil and technology to decrease time lags, are present.

There are signs, however, that oil shale producers might be more careful when re-entering the market, illustrated by Bill Thomas’, Chief Executive at EOG Resources Inc. (largest landholder in Texas’ Eagle Ford shale formation), statements reprinted by BloombergBusiness: “We’re going to make sure the market is in good shape it’s balanced, and we got a future… we don’t want to ramp it up and drive the price of oil down again.” Thomas added that it is his belief that the oil industry will eventually settle into a price range of $70 – $80 a barrel. This leaves tremendous opportunities for profit in the oil shale industry, not only in the U.S., but all over the world.

The Shale oil industry has already had tremendous effects on the oil market, with a current fight for market share and control (a recurring theme in the oil market) going on between the traditional oil producing nations, including OPEC, and independent oil companies (IOC’s) in the U.S., predominantly. The oil shale industry might take a break, and the IOC’s may very well have won the battle, but it is doubtful that they will win the war.


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