It looks like a stain as you can see the wood through it at least from the picture anyway.

I would wash it with a cleaner such as JOMAX to remove dirt and mildew. Then sand to remove the flaking powdery stain. I think you will need to use a solid stain as the wood looks like it has discolored and that will show through another semi-transparent stain, which is what you most likely have. To use solid you will need to prime with an exterior oil based primer(NOT KILZ) such as Ben Moore Fresh Start Oil primer #094. Then apply one or two coats of Ben Moore Moorwood Acrylic Solid Hide Stain.

Yes you can do this.

How would I sand the shingles? By hand? I do have a Porter Cable polisher which I use with buffing pads on my car, I'm guessing I could get a sanding pad?

What about power washing? Internet research seems to be split wether its a good idea or not. Is there a chemcial option?

You know on second inspection, when I run my hand across the shingles I think I'm actually picking up wood fibers more so than just the stain chalking off. Does this change anything?

Sure you can sand with an electric sander, and this will work on getting the loose wood fibers off. You want to get down to a sound substrate in order to have good adhesion of your paint.The problem I have with power washing is that the cleaner is often diluted to much to remove dirt and mildew like it should.