Shale Band

What is the 'Shale Band'

The shale band refers to a price level at which most North American deposits that can be accessed with hydraulic fracturing technology become profitable. The shale band was coined by Olivier Jakob, managing director of Petromatrix, to identify a pricing band at the bottom of which fracking production comes offline and the top of which fracking production starts ramping up to full capacity. The potential increase of production within that band would push up global output and likely blunt further price gains unless demand significantly outstrips the extra supply.

BREAKING DOWN 'Shale Band'

If proven to be a consistent market factor, the shale band will play a significant role in oil price trends. The price points creating the band were originally placed at $45 a barrel for the production drop off and $65 a barrel for the point where shale production goes full tilt. Both numbers were dropped down by $5 a barrel as it became clear that the technology behind shale production has improved to the point where fracked wells are being completed more efficiently for less cost per barrel.

The Shale Band and Exploration Investment

The shale band makes sense from an economic perspective. There are shale wells that appear to be making money lower than $45 a barrel, but less investment in new wells and rigs occurs at these levels. Even though the technology and its use is improving as more wells are fracked, there is no guarantee a new well will be profitable at $40 a barrel. The odds of a fracked well being profitable at $60 a barrel, however, make it a much safer bet for energy companies.

The bigger question is how much of a price dampening effect the shale band will play in the market. Shale wells are quick to get up and running, and they tend to produce at high levels in the beginning, depleting rapidly thereafter. So shale production needs to be fed by a constant supply of new wells being drilled and readied for fracking. For short term spikes in demand, shale rigs can certainly provide the extra supply, suppressing prices. The longer term supply question is yet to be answered, but presumable more money will be invested in more rigs to allow for more production once the shale band has been breached.

The Shale Band and Nimble Supply

There are other factors that influence oil prices, not least the amounts of oil sitting in storage waiting for better market prices. In periods of extreme oversupply and record inventories, the shale band may not get the opportunity to impact prices. However, when demand starts to take off, the shale band will be the first line of nimble production to respond and, consequently, slow down the price climb.