Impact of Shale oil on Crude prices

Until recently, once which was believed to be an unsinkable industry is floundering. The rise
of shale oil and hydro-fracking in the US has forced the observers of the oil industry to look
the industry from a completely new lens.
According to the Energy Information Administration (EIA) of the Department of Energy, US
crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels as 2016
began. One of the key reason for an oversupply of oil resulting in the crash of oil prices from
over $100 to sub $50 levels.
Hydraulic fracking is an important advancement in technology in oil and gas industry. This
technology has given rise to a large number of shale oil producers in the US. Shale oil: A
type of unconventional oil found in shale formations. Shale oil can refer to two types of
oil. It may refer to crude oil that is found within shale formations, or to oil that is extracted
from oil shale. Oil shale is a type of sedimentary rock that has low permeability, and
which has bituminous-like solids that can be liquefied during the extraction process.
Shale oil and shale gas formations can be found around the world. Countries with the
largest amount of technically recoverable shale oil resources include Russia, the United
States, China, Argentina, and Libya. In 2013, the U.S. Energy Information Administration
estimated that 345 billion barrels of shale oil might be technically recoverable, making up
approximately 11% of total crude oil resources.

Give the cost of extracting the oil from shale oil is much higher that conventional oil drilling,
it offers flexibility to suspend the production when the oil prices are down and ramp up the
production when the crude prices are high. Flexibility in operations helps the producers to act
with a change in demand as against conventional oil drilling where it takes a considerable
amount of time and money to develop and extract oil. Shale oil is more elastic to demand as
compared to conventional oil and acts as a valve on the pressure cooker, regulating the oil
prices.
However, there is a lag in the ramping up the production or suspending the rig operations.
When the oil prices started to crash, late 2014, many shale producers thought it to be a
temporary correction in oil prices, and it took them a while to realize the fact that there was
much more of supply than the demand, which led them to maintain a higher output.
The cost of drilling the shale oil can vary anywhere from $30 to $80. The recent crash in oil
prices to sub $50 levels, forced many shale oil producers to suspend drilling activities as the
wells were not profitable, resulting in the temporary upward movement of oil prices to just
over $50.

The International Energy Agency, an industry forecaster, said on June 14th that demand will
not match supply until next year. The oil industry is approximately producing more than 1
million barrels per day (b/d). Also, the majority of the shale oil producers are in huge debt
due to the funds raised during the shale boom of 2010-2014. Hence, the overall cost of
producing shale oil will only increase with time.
The price of the crude oil produced will once again depend on the capacities of the
conventional oil producers such as Saudi Arabia and other OPEC countries. Oil and gas
producers have promised to cut at least $1 trillion from their planned investment in
exploration and production in 2015-20, reducing projected output by the equivalent of a
whopping 7 billion b/d.
With increased demand from emerging markets on account of low crude prices and cut in
planned investment in the exploration of oil. Oil prices will start inching towards $80. Where
shale oil producers may again find lucrative to restart their operations.
Hence, the battle between the sheikman and shaleman will continue, and oil prices will be
expected to continue trade in a range of $50 to $80.