Coal Miners Could Benefit from Higher Natural Gas Prices

Coal Indicators That You Need to Have on Your Watch List PART 2 OF 10

Natural gas prices

The Henry Hub benchmark natural gas prices came in at $3.11 per MMBtu (million British thermal units) for the week ended September 23, 2016. This compares to $3.02 per MMBtu for the previous week.

Natural gas futures prices also rose to $3.00 per MMBtu for the week ended September 23, from $2.92 per MMBtu in the previous week.

Coal Miners Could Benefit from Higher Natural Gas Prices

Moreover, lower-than-expected week-over-week natural gas inventory addition and OPEC’s agreement on crude oil production curtailment bolstered commodity prices through September 30, 2016.

Why are these indicators important?

The shale gas boom across the United States has led to a massive rise in natural gas production. This spurred a fall in natural gas prices and as a result, natural gas became a strong competitor of coal, particularly in 2015. Cleaner, more competitive natural gas has eaten away at the market share of coal in electricity generation, which is a continuing trend.

As we discussed in the first part of this series, natural gas prices and coal’s market share in electricity generation are closely related. When natural gas prices rise, coal gains market share because it becomes more cost-effective for utilities to use coal for power generation. On the other hand, a fall in natural gas prices generally leads to a drop in coal’s market share.

Impact on coal and utilities

An increase in natural gas prices can have a positive impact on coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resources Partners (NRP).

For utilities (XLU) such as Dynegy (DYN) and NRG Energy (NRG), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible because the cost of fuel is part of the tariff calculations. On the other hand, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.

Next, let’s analyze the continued recovery we’ve recently seen in crude oil.

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