What is the 'Shale Band'?

The shale band refers to the 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, who identified a pricing band at the bottom of which fracking production comes offline and at the top of which fracking production starts ramping up to full capacity. The potential increase of production within that band pushes up global output and can 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 proceeds at full tilt. Both numbers were dropped by $5 a barrel as it became clear that the technology behind shale production had improved to the point where fracked wells are 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. Although the technology and its use are 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 have on the market. Shale wells are up and running within a short time, and they tend to produce at high levels in the beginning with a steep drop-off thereafter. Thus, shale production requires a constant supply of new wells to be drilled and readied for fracking. For short-term spikes in demand, shale rigs can certainly provide the extra supply, suppressing prices. Longer-term supply is uncertain, but it is expected that additional money will be invested in 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 including the amount of oil that is stored until the prices improve. In periods of extreme oversupply and record inventories, the shale band may not have the opportunity to impact prices. However, when demand starts to rise, the shale band will be the first line of nimble production to respond and, consequently, slow down the price increase.

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