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 in electricity generation.
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.
Week ending March 6
Despite the neutral inventory report, natural gas prices fell marginally during the week ended March 6. The Henry Hub benchmark price dropped a cent to $3.01 per million British thermal units, or MMBtu, from $3.02 a week earlier.
During the same period, the front month contract prices increased to $2.77 per MMBtu compared to $2.82 a week earlier.
Impact on coal and utilities
A fall in natural gas prices is a negative for coal producers (KOL) like Alpha Natural Resources (ANR) and Arch Coal (ACI) as natural gas becomes more competitive as a fuel in electricity generation against coal. For utilities such as AES (AES) and PPL (PPL), the impact depends on the level of regulation. If their contracts are strictly on a cost-plus basis—where they get a fixed return over and above costs—it doesn’t affect them much. For utilities with fixed price contracts—where they get a fixed price irrespective of changes in input costs—the fall in natural gas prices is positive.