Why cooler weather doesn’t help natural gas prices

Natural gas prices

The shale gas boom led to a massive rise in production. It also led to a fall in natural gas prices. As a result, natural gas became a competing fuel for coal. It ate away at coal’s market share.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices rise, coal gains market share. 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. Coal’s market share drops because natural gas is available at cheaper rates.

Why cooler weather doesn’t help natural gas prices

Natural gas prices are depressed

Even though colder weather finally engulfed the eastern portion of the US and the Midwest, natural gas prices remained subdued during the week ending January 9.

Natural gas front month contracts are the futures contract trades at NYMEX. The contracts are about to expire. NYMEX futures prices are widely used as a national benchmark. Front month contract prices dropped by 4.3% to $2.91 per British thermal units in millions, or MMBtu. In contrast, spot prices remained stable at $3.03.

During the week, front month contract prices dropped below spot prices for the first time since the week ending October 17, 2014. When front month contract prices drop below spot prices, it could signal pessimism in the markets.

Impact on coal

So far, natural gas prices remained subdued this winter. Subdued natural gas prices aren’t a good sign for thermal coal producers (KOL)—like Peabody Energy (BTU), Arch Coal (ACI), Alpha Natural Resources (ANR), and Cloud Peak Energy (CLD). Weak natural gas prices may take away coal’s market share—especially in the eastern half of the US.