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Natural gas prices decreased – not good for coal

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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. Natural gas 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 the coal’s market share. Natural gas is available at cheaper rates.

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Week ending February 27

After rising for two consecutive weeks, natural gas prices dropped again on higher-than-expected inventory and improved weather conditions during the week. The Henry Hub benchmark price dropped a little to $3.02 per British thermal units in millions, or MMBtu, from $3.05 a week earlier.

During the same period, the front month contract prices increased to $2.82 per MMBtu—compared to $2.84 a week earlier.

Impact on coal

Retreating natural gas prices aren’t good news for the coal industry. Natural gas competes with coal as a fuel for electricity generation. With benchmark 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 Appalachian. Peabody Energy (BTU) is the biggest producer in the Illinois Basin. Peabody Energy is part of the iShares North American Natural Resources ETF (IGE). All of these players have operations in the Powder River Basin, or PRB. Cloud Peak Energy (CLD) only mines in the PRB.

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