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Uptick in price of natural gas gives hope to coal producers

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Natural gas prices

The shale gas boom has led to a massive rise in US production. It’s also led to a fall in natural gas prices. As a result, natural gas now competes with coal as a fuel and has eaten 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. Natural gas is available at cheaper rates.

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Week ending February 13

Cooler weather and inventory draw-down as per expectations arrested a fall in natural gas prices for the week ending February 13. The Henry Hub benchmark price scaled up a little to $2.96 per British thermal units in millions, or MMBtu, rising from $2.88 a week earlier.

During the same period, the front-month contract prices increased to $2.72 per MMBtu compared to $2.66 a week earlier.

Impact on coal

The marginal increase in natural gas prices last week is good news for coal producers (KOL), especially the ones in the Appalachians and the Midwest. However, a sustained increase in natural gas prices over a few weeks is needed before coal producers will benefit materially.

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

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

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