Tight oil might be a common phrase for industry professionals or oil traders, but its a rather new term for the laymen to digest. The IEA has predicted world ‘tight oil’ production will double in the next 25 years; given this proclaimation, its time to understand more of the economics and geopolitics surrounding tight oil.

Tight oil = Fracking = higher costs

Hydraulic fracturing or ‘fracking’ has been a media nightmare for many oil and gas companies. In some ways, tight oil is comparable to shale in that both host oil in low-permeability reservoirs. In other words, it is not easy to extract. Stimulation or fracking is necessary. From a headlines and media perspective, I find it interesting that as shale oil became closely associated with fracking, the advent of ‘tight’ oil or tight oil reservoirs came about.

CSUR or the Canadian Society for Unconventional Resources, wrote a report titled Understanding Tight Oil, which explained:

“Tight oil is conventional oil that is found within reservoirs with very low permeability. The oil contained within these reservoir rocks typically will not flow to the wellbore at economic rates without assistance from technologically advanced drilling and completion processes.”

tight oil
image source: http://www.csur.com/sites/default/files/Understanding_TightOil_FINAL.pdf


Tight oil reservoirs require stimulation; this is where fracking comes in, the most common extraction type of used by the oil and gas industry on low-permeability reservoirs. The International Energy Association released a report on Friday, which predicted “World tight oil production is expected to more than double between 2015 and 2040, increasing from 4.98 million barrels per day (b/d) in 2015 to 10.36 million b/d in 2040…”

image source: https://www.eia.gov/todayinenergy/detail.cfm?id=27492


The recent EIA report showed declining, yet resilient United States tight oil production. Tight oil production peaked at 4.6 million b/d in March 2015 but had fallen to 4.1 million b/d in June 2016, according to the report. While production hasn’t collapsed, if oil prices were to fall below $40 and stay there, production would continue to decline.

Shale oil production costs

While the exact cost per shale oil well varies from region to region, the lowest break even estimates tend to come in at about $40 per barrel. This makes the case for $40 being a long-term bottom in oil prices as it would make billions of barrels unprofitable in much of the western world. Investopedia explains, “…many sources put the average break even point for a fracked horizontal well above $60 a barrel with the higher-cost wells coming in at over $90 a barrel.”

So, tight oil needs higher prices to make fracking economically feasible.

Bearish case for oil remains

In a June 12th Weekly Volume, titled Oil is Peaking for the Year, we broke down the sector and explained why oil would remain subdued in the coming quarters. Our thesis behind this prediction was quite simple and based on supply being the common denominator:

“What’s more, the IEA is predicting global demand to cross the 100 million barrels/day mark by 2018 and actually move into a supply deficit that year. If this happens, oil prices will likely retest $100.”


Click here to read Oil is Peaking for the Year.

Bearish bets on oil price continue

Morgan Stanley’s oil analyst Adam Longson came out with a report explaining that the recent oil-price jump has been driven by traders covering bearish bets… while I generally don’t speculate on the activity of shorts, the market fundamentals (supply/demand) have not given cause for such a rally.

Zero Hedge reported this morning that,

“According to Longson, a “sizeable” amount of Sept. WTI put positions at $40, $45 recently came into or near the money, leading to spike in hedging by traders to cover their exposure. However, the good news for oil bears is that the effect of this action will fade once option expires Aug. 17. As we have pointed out previously, the recent comments from OPEC, and IEA helped reverse bearishness and also unleash the recent short squeeze which led to the biggest weekly jump in oil in 4 months.”

Longson reiterated that he sees rising U.S. crude inventories in coming months…

Higher supply will lead to lower prices and declining tight oil production. It’s just that simple. Only when supply diminishes due to real demand will oil prices and tight oil production rise together.


This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.