Oil price is so volatile that any forecast for even half a year is not informative. What are the features of oil as a commodity that does not allow predicting its price?
Historically oil was a product with a rather non-elastic supply. There are developed fields and the oil companies usually bear expenses before commencement of production (geological exploration, development, construction of oil pipelines and etc). When the well is developed, the costs of production were relatively low from $1.00-$3.00 to $8.00-$10.00 per barrel in main oil producing countries. Thus, even when oil dropped to $10.00 at the end of the 1990s, nobody suspended production, because it still remained profitable.
If demand increased in the world economy, then it was almost impossible to increase volume of production within a limited period of time: exploration and putting of new fields into operation could take several years. Nobody could guarantee that when the field starts working the price will not go back down and the company will not lose money. Because of this non-elastic supply oil prices were going up with growth of demand (even insignificant) and went down when the demand was decreasing in the short and medium-term. OPEC was established to regulate the oil supply ensuring somewhat “fair” oil prices.
However, commercial development of shale oil could change behavior of prices. Shale oil is light oil extracted on a small depth using hydraulic seam fracture.
USA is the most active in this area and thanks to the shale revolution it became the oil production leader in the world in 2014. Exact volume of extracted oil is hard to mention, because the wells are closed and opened depending on the price, but this summer the US extracted about 5-5.5 million barrels a day, which is about half of the world shale volume. One can suppose that total supply of shale oil is about 10% of the world supply.
Drilling of one shale well takes only several months and costs about $4-6 billion. Cost price on the main fields varies between $35.00 and $95.00 per barrel. The technology of shale oil production allows reacting to the price very quickly.
If oil price drops below $35.00-40.00, then drilling of new wells will be simply suspended and as the operating wells are exhausted very quickly, the supply will drop in several months and the price will go up again. If oil price keeps on growing, then the companies will put into operation the wells with the cost price of $50.00 and then $60.00 and etc. They could be launched very quickly and after several months the price growth will stop.
As share of shale oil constantly grows, this factor’s influence on the market will become stronger.
If shale oil can regulate the supply, then oil price will vary within the cost price of shale oil production, which is between $35.00 and $95.00 per barrel, said Maxim Mironov, Professor of Madrid-based IE Business School.
