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Coal is pressured by a higher-than-expected natural gas inventory

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Natural gas inventory

Commodity prices are a function of demand and supply. If demand increases while supply remains constant, the prices increase because more customers are chasing each unit of the commodity. In contrast, if supply increases for a given level of demand, prices drop because the commodity is available in abundance.

The EIA (U.S. Energy Information Administration) publishes a weekly natural gas inventory and withdrawal report every Thursday. The report is for the week ending February 20.

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Natural gas inventory is higher than expected

Throughout the year, natural gas is stored underground in order to save the fuel for the peak demand during the winter. For the week ending February 20, the inventory came in at 1,938 billion cubic feet, or Bcf. It was 22 Bcf higher than Wall Street analysts’ expectations.

The inventory figure for the week was in line with the five-year average. However, it’s still higher than the 1,339 Bcf last year. In 2014, the severe winter caused a rapid inventory draw-down.

Impact on coal

Higher-than-expected inventory is negative for coal. It signals higher-than-expected supply resulting in subdued natural gas prices. Weak natural gas prices aren’t a good sign for coal producers, especially the ones with operations in the East and Midwest—including Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU). Peabody Energy is part of the iShares North American Natural Resources ETF (IGE).

With natural gas prices below $3 per British thermal units in millions, or MMBtu, even the PRB (Powder River Basin) producers—like Cloud Peak Energy (CLD)—are feeling the heat. The PRB is the lowest-cost coal producing region in the US. Due to the lower cost, PRB coal has a better chance to stand against the shale gas revolution.

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