One of the US frac sand market’s main concerns is sand supply exceeding the demand. Hi-Crush Partners (HCLP) temporarily idled one of its facilities due to soft demand. As more local sand capacity is added, the demand for Northern White sand feels the pressure. The trend is expected to continue in the future.
More capacity for Northern White sand than demand will likely put pressure on its pricing until the market balances.
“We are currently forecasting 110 million tons of industry demand in 2018 increasing to 130 million tons in 2019. This is opposite an outlook of 150 million to 155 million tons of effective capacity in 2019,” noted Shinn.
Rising DUC inventory
As the above graph shows, the inventory of DUC (drilled but uncompleted) wells has been rising for more than a year. The demand for frac sand is expected to rise as these wells are completed.
Exhausting E&P capital budgets
Another factor that’s expected to impact frac sand demand in the fourth quarter is the likely exhaustion of capital budgets of exploration and production companies. The factor might get resolved in 2019 with budget allocations early in the year.
“I am positive on the outlook for our Oil and Gas businesses in 2019. While we will likely see more white space on our customer’s calendars for the rest of this year, we believe these near-term challenges are transitory. Budgets will reset in 2019, takeaway capacity will be expanded and the record inventory of DUCs will begin to be completed,” said Shinn.
The above factors might not play out as expected or might get delayed beyond a few quarters. The uncertainty has caught investors’ attention who have sold off their positions, which sent frac sand stocks down.