Natural gas prices
The shale gas boom led to a massive fall in natural gas prices. As a result, natural gas became a competing fuel for coal, eating away market share from coal. Natural gas prices and coal’s market share in electricity generation highly correlate. When natural gas prices rise, coal gains market share, as it becomes more economical to burn coal for power generation. A fall in natural gas prices generally leads to a drop in coal’s market share as natural gas is available at cheaper rates.
Last week (the week ending December 19) saw benchmark natural gas prices remaining stable while near-term futures contract prices dropped, driven by expectations of warmer weather. The natural gas inventory drawdown came in at 64 bcf—marginally lower than the expected 66 bcf, keeping benchmark spot prices steady. But expectations of a milder winter have kept futures prices under pressure. Benchmark Henry Hub prices remained steady at $3.59 per million British thermal units (or MMBtu), while front month contract prices (near-term futures contract prices) dropped to 3.63 per MMBtu for the week ended December 19 from $3.68 per MMBtu for the week earlier.
What does this mean?
A drop in natural gas prices and an expectation of warmer winters aren’t good signs for coal producers (KOL) like Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD). Utilities—especially in the natural gas–rich east—may switch to natural gas if prices continue to drop. Warmer weather might also affect demand for electricity, resulting in coal losing its market share in electricity generation.
The Edison Electric Institute publishes a weekly report on electricity generation in the US. Let’s take a look at it in the next part of this series.