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5 Reasons Shale Production Still Isn't Affecting The Price Of Oil

By Ellen R. Wald, Ph.D.CommoditiesMay 23, 2018 05:30AM ET
www.investing.com/analysis/4-reasons-shale-production-still-isnt-moving-the-price-of-oil-200318512
5 Reasons Shale Production Still Isn't Affecting The Price Of Oil
By Ellen R. Wald, Ph.D.   |  May 23, 2018 05:30AM ET
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Around this past new year, oil prices were climbing higher and many analysts predicted that a rush of new production from U.S. shale oil fields would, over time, put a damper on prices Nearly six months into 2018, U.S. shale oil production continues to grow, yet it still does not seem to be impacting prices as predicted. This can partially be explained by geopolitical events that have pushed prices up, but it is also a result of some serious and systemic impediments facing the U.S. oil industry.

There is a possibility that each of these impediments could change in coming months. If they do, the U.S. shale production numbers and the price of oil will change as well.

1. Pipeline infrastructure

Pipelines in regions where shale oil is produced are running at around full capacity. This has caused problems for smaller oil producers who have to pay more to transport their oil. In fact, producers who do not have contracts in place for pipeline transportation have been forced to sell their oil at a discount. These types of pipeline constraints have actually plagued the U.S. oil industry for years and have forced companies to ship crude in trucks or by rail, two modes of transportation that are more expensive and more dangerous than pipelines.

Now, it seems this bottleneck may be ending. Several new pipeline deals have been announced and other pipelines are already under construction. It is possible that by the end of 2019 the price to transport U.S. oil will have fallen significantly and greater volumes of U.S. oil will be able to reach the market. This would mean that U.S. producers would be able to sell their product without the current discounts (up to $13 off per barrel for some oil, according to some reports). It would also mean that U.S. oil would reach ports more quickly. Improved pipeline infrastructure could make the entire U.S. oil industry more efficient.

2. Ports

U.S. producers have only been free to export their crude oil since the beginning of 2016 and most ports are not equipped to handle the largest tankers (VLCCs) which carry up to 2 million barrels of oil. Most ports capable of exporting oil can handle ships that carry less than half that amount. Only the Louisiana Offshore Oil Port (LOOP) can accept the VLCC tankers for export at present, though there are plans to dredge other ports, such as Texas' Corpus Christi, if funding can be accessed. The lesser capacity of most U.S. ports is another limitation on the efficiency of the U.S. shale oil industry.

3. Personnel and Supplies

Producers in shale oil regions have faced personnel constraints for months now. Companies are paying a premium for truck drivers, roughnecks, welders and other similar positions. There has also been a shortage of sand which used in fracking, although reports are that new sand mines are in the process of alleviating this constraint. Though we have seen an increase in production of U.S. shale oil, the increase is not as high as it might have been without such constraints.

4. Crude grade

Most important to consider, however, is whether there is a sufficient market for even more U.S. shale oil. The oil produced from fracking is a very light type of oil. U.S. refineries are not designed to process so much light crude. Some mix this crude with heavier grades, but the process is not ideal for the refining needs. Building new refineries is almost impossible in today’s regulatory climate. The U.S. has not built a new refinery since 1977, although two small refineries have been permitted and are under construction in South Dakota and south Texas. (Some refineries have expanded their facilities, such as Motiva in 2012 and Valero (NYSE:VLO) in 2017).

Other markets for light crude appear to be saturated as well, except, apparently, for China. According to an opinion piece by an S&P Global Platts content director, independent Chinese refineries want more of the light crude oil that the U.S. shale oil industry produces.

5. Trade War Risk

As of now, the U.S. has only sent two VLCC tankers to China with U.S. crude, but, as U.S. infrastructure constraints ease, there could be more. On the other hand, the amount of crude Chinese independent refineries can import depends on the will of the Chinese government, which issues import licenses twice a year.

It is entirely possible that U.S. crude oil exports to China could become a pawn in the ongoing trade negotiations between China and the U.S. In that case, politics, not the industry, might determine the size of the market for U.S. oil.

5 Reasons Shale Production Still Isn't Affecting The Price Of Oil
 
5 Reasons Shale Production Still Isn't Affecting The Price Of Oil

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Jay Epp
Jay Epp May 25, 2018 10:57AM ET
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OPEC and Russia will not let oil get too high the US shale boom has nothing to do with price.
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follow trade
follow trade May 23, 2018 1:23PM ET
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Now I am waiting for the day, when oil drop 3-5 dollars n you gonna blame increased shale oil production. I don’t know why you are always late in writing.
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follow trade
follow trade May 23, 2018 1:23PM ET
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i think you should start writing ur next article as the moment of retraction is hunting u
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inderjeet virk
inderjeet virk May 23, 2018 9:09AM ET
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sixth reason could be near death experience  shale producers don't want to see again
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Do Deikins
DoRight May 23, 2018 9:09AM ET
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or bankers ...
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