Shale, the new oil swing producer ?

Abstract

Only a few years ago, as the world’s supply of oil was showing evidences of peaking, it was almost certain that the world was slowly running out of its main source of energy. It was certain that the world needed to prepare for a peak oil situation, and prices were breaking records again and again. From this situation emerged a new player in the oil industry that has changed the oil market for the next decades: the US tight oil, also known as shale oil, industry. This revolution was made possible by the high prices of the years 2008-2014 as well as a favorable environment: low interest rates allowed the shale companies to finance themselves for cheap, mineral rights are guaranteed by law, and the country’s need for energy independence gave political support to this industry. From only a few thousand barrels per day in the beginning of this century, the tight oil industry grew swiftly, and produces today about 4.25 million barrels per day, which is more than Iran, the fifth biggest producing country in the world. Obviously, this new player shook up the oil industry, and reshuffled the cards in the oil market. OPEC, and particularly Saudi Arabia, the biggest crude oil producer in the world, which has been able to influence global price of oil, is losing slightly its market power. This research focus itself on the status of the swing producer, the producer that has this capacity of balancing the market of oil, preventing shortages or gluts. This “role” that has been held by Saudi Arabia since the 70’s, is now appearing to shift to the American shale producers. This study will present the actual state of the shale industry, to get a better understanding of the dynamics involved in this particular player in the oil market. Then, it will assess the characteristics of the swing producer and the characteristics of the previous swings. Finally, this research study the implications of this new situation on the oil market. New varieties of crudes are available on the market, and the trade flows of both crude and refined oil products are changing. By gathering and analyzing data and reports from the industry, specifically major factors such as prices, inventories, forward curves and trade flows, this study has come to the following conclusion: • The shale industry, while having different characteristics compared to the previous swing producers, is the new price maker of the oil market. • The emergence of this new player changed the rules in the oil game and forced conventional producers such as OPEC to adapt • The market is entering a cycle of low prices that could last for year