July 13, 2017    5 minute read

How the Shale Revolution Is Disrupting the Traditional Oil Market

Black Gold    July 13, 2017    5 minute read

How the Shale Revolution Is Disrupting the Traditional Oil Market

Energy, and oil in particular, have always been a source of geopolitical power. Every country is in need of it, but few have the resources necessary to procure it themselves.

Many nations have such an abundance of it that their economies are completely reliant on oil, making them heavily vulnerable to price fluctuations. When oil prices are high, such countries act as oil-market makers, but when prices start to lower, as is happening now, their budget deficits widen to maintain the big net of social services and the international sphere of influence that characterise oil-exporting countries such as Saudi Arabia and Russia, as former New York Times author John Mauldin reported in his newsletter.

In the past six years, when oil prices dropped, oil producers kept scaling up extraction to increase their market share, with the objective of obtaining higher profits once price rebounded. No assumption could have been more wrong than this. In fact, a major role in this story has been played by the United States, where improved techniques of hydraulic fracturing, or fracking, enabled oil companies to gain access to the biggest oil reserves in the world, according to George Friedman, a political geographer.

OPEC vs. the US

As Andy Hall, a hedge fund manager has said, OPEC has failed its mission, by cutting production instead of exports, and by “talking up” the market, letting US shale drillers to attract investors while prices briefly soared. The latest effect of OPEC strategy is the 18% fall of oil futures since the beginning of the year.

Given that the total costs for each well in the US are continuously shrinking, at $2.8m to $7m, depending on the geographical location compared to  $20m-$30m in Nigeria, and more than $200m for an oil rig in the North Sea, the US Energy Information Administration believes that by 2020, the United States alone will export more oil than most OPEC countries.

In fact, PIRA Energy estimates predict that in three years the US will export 2.25m barrels a day, against the 2.1m b/d of Kuwait, 1.7m b/d of Nigeria, and 1m b/d of the US at the beginning of the year.  With Asian markets led by China scaling up their demand for crude, there is little surprise that leading oil trading houses have reacted very quickly to the “shale revolution”.

As early as 2016, Mercuria, one of the biggest energy traders, acquired a crude supply and marketing business that was the key to more than 150 new shale producers all across the US, Bloomberg sources reported. Furthermore, what is most surprising is that Mercuria is rumoured to be courting Argentinian shale oil and gas producer Andes Energia, revealing a new long-term approach to the oil market in the region.

According to Gary Ross, global head of oil at PIRA, while the US will rank in the top ten oil exporters, it is unlikely it will either join OPEC or cut production in an effort to keep prices up, because it simply has no interest in doing so: it strengthens Donald Trump’s political agenda of “energy dominance”.

The US’ Reliance on Oil Imports

However, it is rightful to point out that the United States will not become independent from oil imports in the immediate future. In fact, the whole infrastructure of refineries and plants has been built to process heavier crude extracted in Saudi Arabia and Canada. It will take a longer time before oil companies see an economic incentive to re-adapt their refineries to the light oil from Texas, but with the current pace of technological progress in the green energy sector, this option may be outdated even before being practically conceived.

Oil Volatility and Bond Sales

On the other end, among the negative effects of American shale oil and gas flooding the global markets, apart from the obvious environmental threat, is the enhanced volatility in oil price. While investors were optimistic on oil prices at the beginning of this year, they have been let down soon after the market turned down again. Investors now demand higher yields and lower prices to get deals done, reports a Financial Times article, forcing energy companies to do more refinance-driven bond deals, where shareholders have restructured their equity holdings to a safer and more comfortable position.

As oil price weakens, so does high yield, and vice versa, but as Warren Estey, head of America’s natural resources at Deutsche Bank sustained, increased volatility means less room for errors when markets become more efficient, even if the eventual profits can be sky high.

The Threat to Saudi Aramco’s IPO

In this context, large investment in traditional oil exploration, infrastructure and long-term development are following a downward trend. This situation can be detrimental for established firms under upgrade, such as Saudi Aramco and its anxiously awaited IPO. As management plans to invest more than $300bn in the coming decade, for exploration and keeping up production capacity, analysts appear sceptical on Aramco long-term future, even if the company starts to gear towards solar and wind energy.


In conclusion, this “Shale Revolution” also highlights not only a change in the oil market, now that the traditional oligopoly is broken, but, as Hall remarked in his statement, it also implies a shift from the classical trading and banking approach to oil investing. From long-term bullish positions, bankers and traders should adopt a short-term strategic approach, to better adapt to the new, highly volatile reality, brought by shale oil and gas.

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