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Fracking Is Shaking Up the Playing Field

11 July 2014 in Trading Ideas

From energy and financial markets to the Earth’s very surface, the impact of the shale-extraction process known as hydraulic fracturing – “fracking” – has never been more acute.

Earlier this week, the price of Texas crude oil fell for a ninth straight day as supplies rose at Cushing Oklahoma, the delivery point for crude contracts.1

Gasoline inventories, meanwhile, rose by 579,000 barrels, as demand slipped by 3.9% from a year earlier.

 

According to a report by Bloomberg, US crude production has increased to 8.51 million barrels a day, the highest level since 1986. Output has surged this year as a combination of horizontal drilling and fracking has unlocked supplies trapped in shale formations, including the Bakken in North Dakota and the Eagle Ford in Texas.

And, unsurprisingly, the companies supplying the technologies, as well their shareholders, have been reaping the benefits. The Frack Attack motif, for example, has gained 30.1% in 2014. In that same time frame, the S&P 500 is up 8.3%.

In the past month, the motif has risen 4%; the S&P 500 has increased 0.8%.

However, with the increasing encroachment of the use of fracking has come pushback from environmentalists and citizens concerned about the drilling after-effects, chief among them the concern about pollution of drinking water sources as a result of shooting a watery mix of sand and chemicals underground to release oil and gas trapped in shale rock.

On June 30, New York’s highest court let cities and towns block hydraulic fracturing within their borders. Bloomberg reported that the decision was a setback for companies that want access to the Marcellus Shale deposit that extends across the state’s border with Pennsylvania. New York Governor Andrew Cuomo is weighing whether to lift a ban on fracking issued in 2008.2

In Colorado, environmental groups are pushing for a referendum to ban the practice, which has put some wells closer to schools, parks and other community centers.

And if that wasn’t enough: earthquakes in Oklahoma. A separate item recently published by Bloomberg found that the state’s seismology chief is undertaking the search to find out what has been responsible for the epidemic of earthquakes this year.3

As recently as 2003, Oklahoma was ranked 17th among US continental states for seismic activity. This year, however, the state has vaulted to No. 1, experiencing twice as many earthquakes as California.

According to Bloomberg, the seismology chief’s top suspicion is that pumping wastewater from fracking has a lot to do with it.

These possible headwinds speak to a note of caution for investors in fracking stocks. For now, however, the flow of US crude oil continues at record pace.

1Mark Shenk, “WTI Slips for Ninth Day After Supplies Advance at Cushing,” bloomberg.com, July 9, 2014, http://www.bloomberg.com/news/2014-07-09/wti-slips-a-ninth-day-on-cushing-supply-gain-brent-drops.html.

2Jim Snyder, “Fracking Guidelines Issued by API to Ease Community Fears,” bloomberg.com, July 9, 2014, http://www.bloomberg.com/news/2014-07-09/fracking-guidelines-issued-by-api-to-ease-community-fears.html.

3Zain Shauk, “Fracking Fears Grow as Oklahoma Hit by More Earthquakes Than California,” bloomberg.com, July 7, 2014, http://www.bloomberg.com/news/2014-07-07/oklahoma-temblors-outpace-california-as-fracking-booms.html.

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