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Fracking's big benefit may be steadier oil prices

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Christopher SwannKevin Allison
Last Updated : Jan 21 2014 | 10:31 PM IST
The US shale revolution promises steadier global energy prices. Despite a price slide since the year-end, crude volatility is at 20-year lows. There's more oil around - which may have knock-on effects in the Middle East - and the flexibility of shale wells means drillers can respond quickly to changes in demand.

Brent crude averaged $108 a barrel in 2013, barely changed from $111 the year before despite a sharp increase in supply disruptions. Strife in Libya, sanctions on Iran and other troubles kept an average of 2.6 million barrels per day of oil off the market last year, according to the US Energy Information Administration, up from 1.9 million barrels per day in 2012.

Yet, oil price volatility, a measure of the severity of daily market moves, recently fell to levels last seen in the early 1990s, according to a Breakingviews analysis. The recent bounty of shale may partly explain this. US production has climbed by 2.3 million barrels a day since the start of 2011 - roughly the entire crude output of Brazil. At just over four million barrels a day, shale oil now accounts for about 4.5 per cent of total global oil output.

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Citigroup believes the United States will add about 1 million barrels a day more production in 2014, mostly from shale. Reduced imports will have an indirect effect on the global market price. If nothing else, new sources of crude are a psychological help to traders after years of worries about tight supply.

Just the flow of shale oil may have helped keep price gyrations in check - so far, producers are pumping as much as possible. But shale basins are also unusually flexible. That may make them important price stabilisers in the future, especially if US policymakers approve substantial crude exports. Wells can be drilled in less than a month, against a year or more for conventional projects, and they require only a fraction of the investment.

US gas producers' recent moves to cut shale output in response to falling prices shows the way for their oil brethren. In the meantime, Saudi Arabia, currently the world's swing producer, may adjust its own output to avoid price falls, further reducing volatility. Either way, more stable crude prices should be a boon for companies and governments trying to plan for the future.

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First Published: Jan 21 2014 | 9:31 PM IST

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