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Due to a lingering state of oversupply throughout the first half
of 2019, proppant and sand suppliers have had to adapt to a
"survival of the fittest" financial and operational landscape,
while operators continue to enjoy the ongoing supplier power
working in their favor.
Current conditions aside, IHS Markit believes both Northern
White Sand (NWS) and regional/in-basin sands will reach a bottom
toward the end of 2019-Q2 or very early 2019-Q3. In fact, some
proppant suppliers may even begin to announce very slight price
increases due to multiple contractual variables and often many
diverse, situational circumstances throughout different basin
destinations.
Figure 1: Annual percentage
change of North American frac sand supply & demand versus IHS
Markit and US BLS wholesale sand pricing indices
The drastic dichotomy of supply and demand from 2017 to 2018 was
due to a mixture of market dynamics that created a perfect storm of
quarterly market volatility, with highs and lows that have
fundamentally remolded the traditional proppant market paradigm,
into a regionally, logistics focused, and commoditized market. This
is the current market operators' supply chains have adapted to - to
minimize cost and nearly exploit all channels at all costs possible
- and will continue to operate within at least through 2019 and
into much of, if not all, 2020 unless commodity pricing rises
substantially.
As market demand largely shifted from NWS to regional and
in-basin sand sources from late 2017 and throughout 2018, sand
supply severely outstripped demand in 2018 due to not only the
hasty ramp up of regional/in-basin sand sources (mainly within the
Permian), but also the tempering of operator activity caused by the
constrained takeaway capacity in the Permian at the same time.
These conditions led most sand proppant producers to focus on
improving margins in nearly any way possible which has resulted in
a laser-focused approach to 'right-sizing' production within the
leanest and most cost-efficient facilities, mines, and plants,
inclusive of idling capacity. Currently, we approximate the total
US sand supply to be heavily weighted at 62% regional and in-basin
sand, with more than one-third mined within the Permian Basin. We
also approximate NWS to make up nearly 36% of the total US sand
supply.
In past updates, we warned of high volatility in spot market
pricing during these dynamic times throughout the second half of
2018 to the second half of 2019, with spot pricing still affecting
overall average price and contract negotiations due to sand
producers offloading inventory, "fire-sales," and other
distress-related cash grabs. However, we now see a market pricing
stabilization occurring throughout the second half of 2019 with
flat to (very) slight price increases heading into 2020 for fine
mesh frac sand, both NWS and regional/in-basin.
IHS Markit's Onshore Services & Materials' recent ProppantIQ
report for the second quarter of 2019 monitors and forecasts
proppant demand, supply, utilization, pricing, trends, and
constraints across key North American markets. The report is
available in its entirety on
Connect™ for Onshore Services & Materials clients.
Figure 1: Annual percentage
change of North American frac sand supply & demand versus IHS
Markit and US BLS wholesale sand pricing indices
