Shale oil is a viscous material of high molecular weight containing hundreds of compounds along with Hydrogen & Carbon. Although the terms shale oil and tight oil are used reciprocally worldwide; in the United States, the oil and gaseous industry commonly refer shale oil to tight oil.
Tight oil refers to the production of resources from low permeability tight formations including carbonates, sandstones, and shales. Typical shale oil refers to the production of resources specifically from tight shale formations.
The growing demand for energy and dearth of easily accessible oil & gas reservoirs have pushed petroleum engineers & geologists to think about other unconventional sources of energy.
Advancement in petroleum exploration technology has steered engineers to shift their attention towards shale oil. Gradually, shale oil has become very popular in various countries like the US, that has witnessed a boom in production from 0.4 million barrels per day in 2007 to more than 9 million barrels per day in March 2020. The production rate, however, has fallen to 7.6 million barrels per day in June 2020 due to Coronavirus led disruptions in operations.
Shale Oil or Tight Oil is an unconventional source of energy and different from conventional oil. The concepts and theories related to petroleum exploration state that the presence of a Petroleum System containing Source, Reservoir, and Seal rocks is mandatory for the generation and accumulation of Hydrocarbon. Source rock is necessary for deposition of organic matter; Reservoir rock is needed to accumulate the migrated Hydrocarbons from source rock and Seal acts as a barrier to check the further migration of Hydrocarbons.
For most of the cases observed, the main type of source rock found for the generation of Hydrocarbons is “Shale”. It is a low-porous and low-permeable rock into which the organic matter gets deposited and in due course of time, with deeper burial, increased temperature and pressure, the deposited organic matter gets converted into kerogen and finally into petroleum.
The main difference between conventional oil and shale oil is the way both get accumulated and collected. Conventional oil is found in the form of porous giant rocks soaked with hydrocarbons found underground in the form of big jars, whereas shale oil is found in smaller batches.
For collecting oil from conventional sources, engineers have to drill a straight vertical well to the reservoir and oil is essentially sucked with the help of pumps or under naturally occurring formation pressure and Darcy flow conditions.
For unconventional sources like shale oil, which is found in small patches, it is difficult to collect all available hydrocarbon from a single well due to Non-Darcy flow, which makes the process economically non-feasible. For the sake of economic feasibility and ease of exploration, the reservoirs need to be hydraulically fractured (fracking) so that isolated patches become interconnected and recovery can be made using a horizontal well.
As per various leading reports like the ARI & Oil & Gas Journal, total recoverable shale oil resources in leading 42 countries including the US consists of around 10% of the world's total crude oil. As per EIA's assessment Russia, U.S., China, Argentina, Libya, Australia, Venezuela, Mexico, Pakistan, and Canada contains around 345 billion barrels of world shale oil. This assessment is based on previously known shale formations whereas the new assessment will include some more recently discovered shale formations which eventually will increase the reserve assessment figures. Currently, only Canada, Argentina, and the United States are commercially producing shale oil. Other countries are still trying to overcome the technical challenges and operational challenges for oil firms to help them launch the shale revolution in their countries.
A lot of controversies like shale oil is a marginal short-term phenomenon and that its reservoir will not last longer, have been proved wrong. After around two decades of declining production, US shale production supported the country to become a net exporter of oil from being an importer.
US shale oil production is the only reason which balanced the volatility in global oil prices despite a decline in the production of Iran & Venezuela.
The shale oil revolution in the US has attracted other countries too to explore their shale oil reserves but it has not yet been exported. The progress in other potential countries has been slow. Although various prosperous countries like Russia, China, and Africa have the potential, only Argentina & Canada started to explore their shale oil at a reasonable pace with the help of different O&G giants like BP and Chevron.
Oil Price decline due to Shell oil production
A rapid decline in the global oil prices was observed after the mid of 2014 which can directly be related to the enhanced production of US shale oil which started to grow since 2014. Although the US was not exporting shale oil in the international market at that time to net importers, the global oil demand has fallen with the US achieving self-sufficiency and hence importing relatively less. Due to this imbalance caused by relatively less demand and surplus supply, the prices of oil start declining.
With an increasing production in shale oil and declining oil prices, the margin of the shale oil producers is taking a hit. It is worth noting that the cost of producing per barrel of shale oil is higher than other conventional oil production. Hence, the dynamics of shale oil production and consumption challenges the oil industry performance significantly.
What is an Absolute Advantage? Absolute advantage is one of the key macroeconomic terms, which is based on the principles of Capitalism and is often utilised in international trade-related decisions. Absolute advantage refers to the competence of a company, region or country to produce goods or services in an efficient manner compared to any other economic entity. The efficiency in production can be achieved by: Production of the same quantity of good or services as produced by other entity by utilising fewer amount of resources Production of a higher quantity of good or services as produced by other entity by using the same amount of resources What is the Significance of Absolute Advantage? Different countries or businesses possess a different set of ability owing to their location, soil composition, weather, infrastructure, or human resource skills. When applied in the right direction, various factors may pan out to offer more cost-effectiveness and hence build absolute advantage of the entity in comparison to others. The absolute advantage remains one of the critical determinants for the choice of the goods or services to be produced. Absolute advantage in a particular area often translates into profitability in the area. The profit margin increases by the achievement of cost efficiency, allowing the entity to ensure higher profitability over the competitors. For example, let us assume that the US can produce ten high-quality aircrafts utilising a specific amount of resources. China, on the other hand, can build 6 similar quality aircrafts using the same amount of resources. Thus, in the production of an aircraft, the US holds Absolute Advantage Let’s say the US has the ability to manufacture a certain amount of steel using 10 tonnes of iron ore. China, on the other hand, can produce the same quantity of steel using 8 tonnes of iron ore.Here, China here holds Absolute Advantage in the production of steel. How Countries Build Absolute Advantage? While natural conditions, which include climatic factors, geometry, topography, cannot be altered for achieving absolute advantage, the countries use the underlying factors strategically in their favour. Furthermore, factors of production are focused at by many companies or nations for building absolute advantages. Some of the strategies for building absolute advantage includes: Development of Technological Competencies- The implementation of innovative or latest technological innovations allows the entities to lower their production cost, facilitating absolute advantage. Enhancing Skills of Human Resources- The improvement in the cost-efficiency, along with the quality of the products, is targeted through imparting varying skill development programs. Many countries subsidize or aid the apprentice or labour training for enhancing the absolute advantage in trade. Improving Infrastructure- The infrastructure enhancement in the form of road, telecommunications, ports, etc. can be useful in enhancing the cost-effectiveness across different industries. What Do We Understand by Comparative Advantage Vs Absolute Advantage? Evaluating the comparative advantage introduces the concept of opportunity cost, which is the deciding factor to determine the production of particular goods or services. Opportunity cost refers to the potential benefits associated with the next best possible alternative which is missed out when one option is chosen over another. The Absolute advantage simply considers the capability of a business or region to deliver goods or services in the most efficient manner. The Comparative Advantage, however, also takes into account the benefits that are forgone if an entity decides for production of a particular product or services. Comparative advantage, based on the notion of mutual benefits, is often used in international trade deals. The Comparative advantage has been the major factor driving the outsourcing of services in search of cheap labour. Understanding through an Example For instance, country A can produce ten televisions with the same amount of resources with which it can make 7 laptops. The opportunity cost per television is 7/10 or 0.7 laptops. Meanwhile, the opportunity cost per laptop is 10/7 or 1.42 television. It highlights that country A is forsaking the production of 0.7 laptops if it is deciding to manufacture one television. On the other hand, it is missing out the opportunity to manufacture 1.42 televisions for every single laptop manufactured. Now, say Country B’s opportunity cost for producing a television is 0.5 laptop, and that of producing laptop is 2 televisions. Then, country B will have a comparative advantage in making televisions, and country A will have comparative advantage in producing laptops. It has to be noted that despite country A having absolute advantages in both the products, it would be mutually beneficial for both the countries if country B produces television while country A produces laptops. Do You Know About Absolute Advantage Theory by Adam Smith? The concept of Absolute Advantage was indicated by Adam Smith in his book called ‘Wealth of Nations’ which focusses on International trade theory. Adam Smith, in his book attacked on the previous mercantilism theory, which mainly stressed for economies to maintain trade surplus in order to command power. The Absolute Advantage theory considered that the countries possess different ability with respect to the production of varying goods or services. It argued that it is not necessary that a state may hold an absolute advantage in the production of all goods, and here the relevance of trade comes into play. It advocates that countries should produce those goods over which they hold a competitive advantage. It would allow the countries to make the same amount of goods using few resources or in less time. The theory propagates the relevance of trade for economic sustainability. What Are the Limitations of the Absolute Advantage Theory? The assumptions used in the Absolute Advantage Theory by Adam Smith may limit the application in real bilateral trade. The limitations of the theory by Adam Smith include: Smith assumed that the productive capabilities of a country could not be transferred between the two countries. However, in practical terms, the competitive scenario aids the nations to acquire new capabilities and acquire new resources, especially in the technological and human resource skill aspects. The two-country trade which was used as a basis for the theory does not consider the trade barriers levied. The present scenario, however, is strikingly dominated by trade wars between economies. Nations impose huge tariffs, import duties and other type of barriers to promote local manufacturers. Absolute Advantage theory assumes that the trade between the two nations will take place only if each of the two economies holds an absolute advantage in one of the commodities traded. However, in general, countries despite not holding absolute advantage are engrossed in international trade, boosting their economic setup.
What are ETFs? ETFs are similar to funds where pooled money of investors is managed by a fund manager, who runs the ETF. These funds invest in equity, debt, commodity or any other asset class, depending on its offering. Good read: Mastering the Basics of Investing in ETFs Price of the ETF is based on a value of net assets in the fund and is subject to change each trading day consistent with underlying changes in the value of net assets. Since ETFs are traded in markets just like shares, the quoted price of an ETF either reflects a discount to its NAV or a premium to its NAV. Investors have flocked to ETFs because of low-cost proposition and opportunity to take exposure in a specific pool of assets, which are professionally managed by an investment team with the investment manager. Some ETFs are also used as a proxy to define sentiment in an underlying sector, commodity or index since ETFs are actively traded in market hours, incorporating the latest information in prices. Fund management businesses have continued launching new and innovative ETFs, which have seen great demand over the past. Read: Gold ETFs register massive capital influx; while PDI, GPP, ERM, AME, RED Under Investors’ Lens Large and popular ETFs have also defied liquidity problems because of large scale investor participation. But it remains a problem with lesser-known ETFs with small market participation. ETFs also pay distributions to the holders that are either derived through interest income, dividend income or capital gain. Active and Passive ETFs With ETFs markets growing strongly as ever, there remains a divide between active fund managers and passive fund managers. Passive investment strategies have grown immensely popular among market participants over time. This strategy is cost effective. Many seasoned investors such as Warren Buffett, John C Bogle- founder of the Vanguard Group have endorsed passive ETFs. Active ETFs do not track a benchmark, and performance is not tracked to any given index. These funds are based on countries, sectors, market capitalisation, asset classes, etc., and active investment management allows a manager to beat the returns delivered by broader markets or indices. If you look at the great investors like Warren Buffet, Philip Fisher or Peter Lynch, they have set themselves as a preamble for active investors, and their record of delivering sustainable returns over the long term continues to attract investors to active alleys of markets. Since Passive ETFs are designed to match returns of respective benchmarks, there is no scope of delivering outperformance no guarantee that fund will not underperform the benchmark. However, the expenses charged to investors are relatively lower compared to Active ETFs. Passive ETFs are cheaper than Active ETFs because the use of resources is limited in the former. Since they are designed to match the benchmark and its underlying securities, trading in Passive ETFs is mostly automated running on algorithms, and stock picking is not required, thereby no research. Read: ETFs: Investors Up the Ante and ETFs Run the Show for Long-Term Returns ETFs based on asset classes and style Sector ETFs: These are the most common type of ETFs in market. Sector ETFs track specific sectors like Information Technology, Consumer Staples, Consumer Discretionary, Metal & Mining. These are similar to index funds but are actively traded in stock exchanges. Equity ETFs: Equity ETFs may include equity-focused Sector ETFs. As the name suggests equity, these funds invest in stocks independently or are benchmarked to a specific index. Perhaps, Equity ETFs are the most common ETFs. Fixed Income ETFs: These funds invest in fixed income instruments and pay distributions out of the interest earned on bonds. Further Fixed Income ETFs can be separated as investment-grade ETFs, high-yield ETFs, Government bond ETFs. Commodity ETFs: Commodity ETFs invest in physical commodities like precious metal, agricultural goods, natural resource. These funds include products like Gold ETFs, Oil ETFs, Grain ETFs, Silver ETFs. Good read: Investing in Commodity ETFs Short ETFs: Also known as inverse ETFs, these funds are designed to benefit when the benchmark is falling. Short ETFs hold short positions in the benchmark index futures or constituents of the index to benefit from fall in value or prices. To know more about short selling read: Minting Money While the Asset Price Tanks; Enter the World of Short Selling Leveraged ETFs: Leveraged ETFs use derivatives to amplify the returns and risks of a fund. These are also called geared ETFs. Leveraged ETFs may also hold equity or bonds along with the derivatives to amplify the net asset value movement of funds. Do read: All You Need to Know About Exchange Traded Funds Why investors prefer ETFs? Passive investment vehicles continue to appear compelling to a large investor base, and there are numerous reasons driving the demand for passive investment vehicles. Low-cost and no minimum investment: ETFs have lower expenses compared to traditional mutual funds, and most of the funds have no minimum investment criteria. As a result, the market for ETFs has grown strong, due to its reach to investors with limited capital. Must read: Mutual Funds vs. ETFs: Which Are Better? Exposure to specific asset classes: Investors with large portfolio also use ETFs to enter to into specific asset classes like Gold ETF or Commodity ETF, but not limited to sector ETFs, theme-based active ETFs like technology, mobility, e-commerce etc. Portfolio diversification: ETFs provide investors with an opportunity to diversify a portfolio of concentrated stocks by including exposure to specific sectors, indices, and commodities. More importantly, the diversification is available at a low-cost investment, which further drives the need for ETFs in a portfolio. Accessibility: It is perhaps the most compelling value ETFs provide to investors. Since ETFs are available on stock exchanges like shares, investor participation remains strong, and some popular ETFs boast high liquidity levels. Read: Confused on How to Invest in ETFs? We Have Some Tips! Further read: 6 Reasons to look at ETFs
What are the Factors of Production? Production of anything requires inputs to produce an output, and the inputs used in the production are known as factors of production. Alternatively, these are resources used in the production of goods and services. Factors of production are also critical to economic growth given the economic growth requires expansion in output/national income or total production. Factors are a class of productive elements, which individually are known as units. Units are interchangeable and homogenous, moreover, they are perfect substitutes for each other. Factors, which constitute a group of units, are not a perfect substitute for each other. Modern economists prefer using ‘inputs’ instead of conventional factors of production: land, labour, capital and entrepreneurship. Classification of Factors of production Land Land includes all the natural resources available such as water and air. It constitutes a natural resource that yields income and is exchangeable for a consideration. In the absence of land, water and sun, a farmer cannot produce crops. Every commodity traded in the world can be traced back to land directly or indirectly. Such as gold is extracted from mines, crude oil is explored and extracted from oil fields, grains are produced in agricultural land. Moreover, the land is arguably the ultimate origination of commodities. Meanwhile, the quantity and quality of land are vital to yield an acceptable utility for the user. But the availability of land does not guarantee economic growth because the ability to use resource determines the optimal use of the resource. Land can be further classified as renewable and non-renewable. Renewable resources can be used again and again in the production like an agricultural land used year after year for the cultivation of food, grains etc. Non-renewable land is not usable again and again and is exhausted as the consumption increases. A gold mine may not yield additional income for a business when ore reserves are exhausted. And a new discovery would provide additional resource. Land, as a blessing of nature, is fixed in supply. Whether the demand increases or decreases, the supply of land will remain the same. As a result, it is not dependent on the price, therefore supply of land is perfectly inelastic. Labour Labour does include not only physical but also mental abilities that are done by humans for a monetary benefit. The contribution of labour depends on the size and quality of labour. For instance, Japan has been successful in the production of small and compact cars, while the US producers were efficient in slightly heavy cars. Higher productivity of labour will likely deliver favourable benefits. As a human factor, labour cannot be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot be separated. Labour is available in return of wages and is not a saleable commodity. While one cannot store labour for future use, the supply of labour is dependent on the need for production. Labour supply is elastic, and it takes time to develop overall supply. Division of labour emphasises on the speciality of labour in a particular work. Every labour group in an organisation is further classified into various divisions, depending on the quality, skills, knowledge and demand. Capital Capital is a critical factor of production and largely means wealth, which includes stock of raw material, machinery, tools, building etc. It is also the money available for productive and investment purposes. Capital also extends to physical assets such as machinery, raw material that are directly used in the production. Securities such as shares and bonds are not classified because they are not used in production, thus not the factor of production. It is largely classified into fixed capital and working capital. Fixed capital is used in the production continuously and incur wear and tear. Fixed capital does not mean it is immovable, but the essence of fixed is the cost incurred, which largely remains fixed over the period of production. The cost incurred in working capital is, however, recovered when the product is sold. Such as the cost of raw material, along with other inputs, is a component of the total cost of the good. Capital also includes human capital. Human capital is also a vital unit of production and means the education, skills, and health of people. It is essential for the improvement in productivity. It is now understood that investments in human capital provide favourable growth. Entrepreneurship Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty associated with the production. Now it is understood that production is a function of land, labour, capital, and entrepreneurship. Entrepreneurship is more concerned with the incorporation of production, rather business affairs, which are managed by other people working on wages. Therefore, an entrepreneur takes the risk and uncertainty associated with production. An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling the factors of production, including land, labour, capital and entrepreneurship. Innovation and development are also associated with entrepreneurship. Entrepreneurs undertake crucial decision of capital allocation, which may include setting up new factors, purchasing machinery, upgrading skills of human capital, innovating units of production etc. Elon Musk is an entrepreneur aspiring to reach mars, produce e-vehicles, launch space travel. He is effectively managing and bringing about the factor of production to achieve results.
Ichimoku Kinko Hyo is a versatile technical indicator used to identify trends, support and resistance, gauge momentum, and to generate buy or sell signals. The name of the indicator translates into “one look equilibrium chart”. Must read: What Is Technical Analysis? The indicator reflects on all of the above parameters by taking multiple averages into consideration and plotting them on a chart, and the interpretation of the chart is factual in nature, i.e., it remains the same irrespective of the time frame. Originally developed by a Japanese journalist – Goichi Hosoda in 1960s, the indicator provides more data points as compared to the traditional candlestick chart, and it could be applied on any type of chart, irrespective to the chart’s own data points, i.e., the chart could be a bar chart, a candlestick chart, or a simple line chart. While at first glance the indicator could seem intimidating and highly technical to novice traders or investors. However, the indicator is relatively easy, and once a trader understands the nitty-gritty of its derivation and implications, it could become quite handy to gauge the market sentiment. Moving Parts of Ichimoku Kinko Hyo The Ichimoku Kin Hyo mainly contains two short-term moving averages- the conversion line (kenkan sen) and the base line (Kijun sen), one medium-term average – Leading Span A (senkou span A), one long-term moving average – Leading Span B (senkou span B), and a historical closing plot – Lagging Span (chikou span). Derivation of Components The conversion line of the indicator is derived by taking the mean value of 9-period high and low. Likewise, the base line of the indicator is derived by taking the mean value of 26-period high and low. The leading Span A is typically the mean value of the conversion line and the base line. The leading Span B is the mean value of 52-period high and low. And the lagging Span is the close plot of 26-period in the past. Cloud 1 – Span A crosses above Span B. Cloud 2 – Span A crosses below Span B. In the definition, we mentioned that the Ichimoku Kin Hyo is factual in nature; thus, in the derivation section, we have used PH and PL notions. The period here could take any from, such as daily, weekly, monthly. So, if we are applying Ichimoku kin Hyo on the daily chart, the PH and PL notion would consider 9-day high and 9-day low. Likewise, if are applying the Ichimoku Kin Hyo indicator on a weekly chart, the PH and PL notion would consider 9-week high and 9-week low, and so on. Interpretation For interpreting signals from the Ichimoku, the first thing which should be considered is the crossover between the conversion line and the base line along with relative position of Span A and Span B. When the conversion line crosses above the base line from below, it is typically considered as a positive signal, and when the conversion line crosses the base line below from above, it is considered as a negative signal. Furthermore, if the positive crossover between the conversion line and the base line takes place above Span A, it reflects on the strength of the trend towards upward. Likewise, if the negative crossover between the conversion line and the base line takes place below Span B, it reflects on the strength of the trend towards downward. Ideally, if Span A trades above Span B, the trend is considered to be an uptrend. Likewise, if Span A trades below Span B, the trend is considered to be a downtrend. The behaviour of the cloud as either support or resistance depends upon the relative position of the price with respect to the cloud. For example, if the price of an asset is trading below cloud, the cloud acts as the resistance zone for the price. Likewise, if the price of an asset is trading above cloud, the cloud acts as the support zone for the price.