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April 17 Update: What Rising Crude Oil Prices Mean for Coal

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Oil prices rise

Both WTI (West Texas Intermediate) and Brent crude prices increased during the week ending April 17. WTI prices increased by around $3 per barrel to $54.81, up from $51.91 per barrel the week of April 10. Brent crude prices averaged $59.57 per barrel during the week of April 17, up from $56.70 the week of April 10. America’s crude oil production is expected to fall in May, which would be the first monthly decline in four years.

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Oil prices

While coal and crude oil don’t compete with each other, it’s important for investors to track oil prices. Coal producers (KOL) including Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected by falling oil prices in a number of ways.

Impact on coal

Crude oil prices are a mixed indicator for the US coal industry (KOL). On one hand, rising oil prices lead to higher fuel costs. Rising oil prices also signal positive sentiment toward the overall energy sector as well as the economy. Energy stocks, including coal stocks, generally follow the trajectory of crude oil prices.

On the other hand, falling crude oil prices drive down fuel costs. The drop in oil prices in the second half of 2014 pulled all energy stocks down.

A sustained drop in oil prices can encourage US producers to reduce production, putting pressure on freight rates. If production drops, there’s likely to be more railcars available to transport coal. Powder River Basin–based coal producers faced severe rail underperformance issues in fiscal 2014. And though the situation is improving, there are still some bottlenecks.

For utilities (XLU), the impact of oil prices isn’t as significant because oil isn’t a major fuel that powers electricity generation in the US.

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