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Rise in natural gas prices supports coal prices

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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 market share from coal.

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. Natural gas is available at cheaper rates.

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Week ending February 20

Cooler weather and anticipated inventory draw-downs resulted in natural gas prices rising for the second consecutive week. The Henry Hub benchmark price scaled up a little to $3.05 per British thermal units in millions, or MMBtu, from $2.96 a week earlier.

During the same period, the front-month contract prices increased to $2.84 per MMBtu compared to $2.72 a week earlier.

Impact on coal

The marginal increase in natural gas prices last week is positive for coal producers (KOL), especially the ones in the Appalachians and the Midwest. Having said that, a sustained increase in natural gas prices over a few weeks is needed for coal prices to rise sustainably.

With natural gas prices just over $3 per MMBtu, even low-cost producers are feeling the heat. Alpha Natural Resources (ANR) and Arch Coal (ACI) mine from the Appalachians. Peabody Energy (BTU) is the biggest producer in the Illinois Basin.

You can access all major coal companies through the iShares Russell 3000 ETF (IWV).

All of these players have operations in the Powder River Basin. Cloud Peak Energy (CLD) only mines in the Powder River Basin.

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