A lot has happened in the frac sand market over the last couple of weeks. Suddenly drillers are using more and the type of sand has changed.
An article in Barrons this weekend pointed out that a year ago drillers used 2,500 tons of sand to frac a well. Today's enhanced fracking techniques call for as much as 8,000 tons of sand per well. That is 80 railcars of sand per well.
Sand is a "proppant" in the fracking procedure. When the water and chemicals are pumped in under extremely high pressure it creates cracks in the rock deep underground. The sand is pumped in with the water to fill those cracks and hold them open. The oil and gas can flow through the sand because it is porous.
With the tripling of proppant per well the cost of that well rose nearly $2 million according to Continental Resources (CLR). Another proppant used in fracking was "ceramic sand" manufactured by Carbo Ceramics. The ceramic proppant has a round shape and smooth sides. Hydrocarbons flow more smoothly through a crack filed with artificial ceramic sand but the ceramic cost more than raw sand.
With the amount of proppant being used tripling the cost of ceramic sand suddenly became too high. Carbo said ceramic proppant sales in Q3 would decline -18% because of the sudden change to raw sand in huge volumes. Carbo was a niche player in the fracking business and growth was off the charts because the high quality raw sand needed for fracking was hard to get in volume in prior years. Frac sand is high-purity quartz that can withstand pressured of 6,000 to 14,000 pounds of pressure per inch.
In just the last year U.S. Silica, Emerge Energy Services, HighCrush Partners and Eagle Materials have all expanded sand capacity significantly and have announced even more capacity coming online next year.
Total raw sand consumption in 2014 is expected to be 95 billion pounds. This is a 30% increase from 2013. PacWest Consulting Partners said raw sand now accounts for more than 90% of proppant used over the last year. The number of horizontal wells to be fracked in North America will climb 14% in 2015 and another 11% in 2016. Total raw and ceramic sand demand is expected to climb 41% from 109 billion pounds in 2014 to 153.4 billion pounds in 2016.
Who knew sand could be so valuable. Demand for sand is so high that prices hit $75 a ton. More than 300,000 railcars of sand will be shipped in 2014 and that will rise to almost 450,000 cars in 2016. This is a boon for railroads like UNP that shipped 94,000 cars in just the first six months of this year. BNSF is building a sand distribution hub south of San Antonio to receive more than one billion pounds shipped from U.S. Silica in Ottawa Illinois to be distributed to the nearby Eagle Ford shale. Sand is the new gold for railroads and sand companies.
Crude inventories declined to an 8 month low of 358 million barrels after declining -4.3 million in the latest week. That is the lowest level since January 24th. Obviously there had to be a big change somewhere and it came from a -1.2 mbpd decline in imports or -8.4 million barrels for the week. This came after the prior week's imports hit a 20-week high at 8.87 mbpd.
It would seem to the casual observer that there was an error in the data for two weeks to be so dramatically different back to back. These reports are submitted by the refiners, storage companies and pipelines every week. Having someone put the wrong date on one or submit it a week late is a common occurrence. Also, with cooler weather here the fog in the Houston ship channel is going to be a regular occurrence that will delay shipments for days. However, this is not likely a fog issue since the low week would come first followed by a week is larger imports as all the tankers offload in rapid succession. This looks more like a paperwork error.
Inventories are still at an 8 month low and that was also helped by an unexpected increase in refinery utilization to 93.4% and very high for this time of year. That is 3.1% higher than the same week in 2013. U.S. production rose by 29,000 bpd. Cushing inventories rose +200,000 barrels to 20.2 million. Cushing inventories have been relatively flat for the last six weeks at just over 20 million barrels and the assumed minimum operating level.
Gasoline inventories declined by -400,000 barrels with gasoline demand rising +74,000 bpd. Imports also rose by +283,000 bpd.
Distillate inventories rose +800,000 barrels to a 3-month high. Distillate demand declined -80,000 bpd, which is surprising since this is heating oil season. Next week we should see a further decline in demand after the outage in Chicago caused the cancellation of more than 1,000 flights.
In the graphic below green represents a recent high and yellow a recent low.
Propane inventories rose 1.68 million barrels to 79.12 million. Inventories are at the highest level since October 1998. Demand declined again from 1,104,000 bpd to 1,076,000 bpd. Propane supplies are not likely to run short this winter.
Natural gas inventories rose +97 Bcf to 2,988 bcf. Inventories are still -12.5% below the five year average at 3,414 Bcf. There are only 5 weeks left in the injection season and at the current rate we may only reach 3,250 Bcf. That is still about 600 Bcf below where we need to be going into the heating season.
The blue line in the chart below shows the current inventory relative to the five year average.
There are no storms or potential Atlantic storms in the long term forecast.
The S&P futures are down again at -5.50 Sunday night and WTI futures are down slightly at $93. I said last Sunday the market was setting up for a volatility event and it definitely appeared. It may not be over. As long as the small caps are declining there is the risk of the big caps losing traction and following them lower.
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