Is Shale Heading for a Revival Already? – 7/29/16

Shale oil accessed via fracking is the marginal supply source for crude oil because it is relatively costly with a quick turnaround time. And as the marginal supply source, shale-oil was hit the hardest when oil prices started to fall.

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After a brutal price collapse that resulted in 429 rigs going out of service in less than two years, it appears that shale drilling operations are stabilizing as oil prices rise past the mid-$40 range. Now with future prices for delivery around $50 a barrel, operators are able lock in a decent profit and many companies are feeling comfortable restarting rigs.

Rigs targeting crude in the U.S. rose by 11 to 341, after 7 were dropped last week, according to Bloomberg.

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Higher and more stable crude oil prices are contributing to the increased drilling in the United States. Although declines from existing wells are expected to result in a net decrease in production, increased drilling and higher well productivity are expected to partially offset the decline. EIA data shows that the average productivity of rigs has continued to increase substantially, as shown in the graph below.

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The July Short-Term Energy Outlook (STEO) forecasts crude oil production from the U.S. mainland to continue to decline through the rest of 2016 before stabilizing in early 2017.

A rebound in sand mining companies provides another indication that fracking is making a recovery as four publicly traded miners of sand have seen their share prices rally by an average of 320% from their 52-week lows. Fracking an average well uses over 4,000 tons of sand to hold open tiny cracks in the rock that allow oil and gas to flow out of it.

Production from the U.S. may also get a boost from the usage of horizontal drilling techniques on old conventional wells, research firm IHS Markit Energy said. The firm claims that there are significant cost savings from using the older wells since there is no cost for the initial vertical drilling and existing infrastructure in place.

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