What happened

Shares of frack sand suppliers are getting crushed today. As of 10:45 a.m. EDT, Fairmount Santrol Holdings (NYSE: FMSA), U.S. Silica (NYSE:SLCA), Smart Sand (NASDAQ:SND), and Hi-Crush Partners (OTC:HCRS.Q) were all down double digits.

So what

One of the culprits is another sell-off in the oil market, with crude falling more than 3% in early trading to around $45 per barrel. That sell-off came despite a massive drop in oil inventories this week, which fell 6.3 million barrels according to the latest government data, well ahead of the 2.5 million barrel draw that analysts expected. On top of that, there was a report out today that OPEC was considering putting a cap on the amount of oil that Nigeria and Libya can produce because rising output from those countries this year has counteracted the organization's efforts to drain the market's excess stockpiles.

The sun shining over a pile of sand.

Image source: Getty Images.

However, what the market has focused on instead is the rapid rise in U.S. output due to fracking. According to the most recent U.S. data, production in the country rose 88,000 barrels a day in the past week, hitting 9.3 million barrels per day. That's up 11% over the past year and back at its 10-month high. That surge in production has also worked to counteract OPEC's efforts, leading many in the industry to suggest that shale drillers need to hit the brakes.

If they do, it would likely cause demand for frack sand to fall, which would impact volumes sold by the likes of Fairmount Santrol Holdings, U.S. Silica, Smart Sand, and Hi-Crush Partners. Those lower volumes would likely cause these producers to cut prices, which would hurt profitability.

Making matters worse, this potential slowdown in demand is coming just as several frack sand producers are expanding their capacity. U.S. Silica and Hi-Crush Partners, for example, are constructing new plants in the fast-growing Permian Basin in western Texas. In U.S. Silica's case, it's investing $225 million to build a mine that can produce 4 million tons of sand per year. That location is important because it would save producers in the region $40 to $60 per ton because they won't have to bring sand in by train from mines in Wisconsin, giving it a competitive advantage over Fairmount Santrol Holdings and Smart Sand.

Meanwhile, this week a third company unveiled plans to build a new frack sand mine in Texas. This plant would supply the region with 5 million tons of sand per year when it becomes operational early next year. That additional capacity, if it comes online at a time that demand for frack sand is falling, could crush frack sand prices, and put more pressure on the financial results of producers.

Now what

Frack sand producers are in a tight spot right now. They expected that stable oil prices this year would enable shale drillers to ramp up their activities, which would drive up demand and pricing for frack sand. However, drillers have increased output quicker than anyone expected, partially due to improving well productivity. That production is weighing on oil prices, and will likely force drillers to slow their pace.  Because of that, there could be more downside ahead for these stocks.

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