Natural gas prices
Natural gas prices dropped during the week ending April 10 on receding winter weather. The Henry Hub benchmark price dropped to $2.56 per British thermal units in millions (or MMBtu), from $2.61 a week earlier.
During the same period, the front month contract prices dropped to $2.52 per MMBtu, compared with $2.65 a week earlier.
Why are they important?
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 and 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, as natural gas is available at cheaper rates.
Impact on coal and utilities
A drop in natural gas prices is negative for coal producers (KOL) like Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP), as natural gas becomes cheaper as a fuel in electricity generation against coal.
For utilities (XLU) such as PG&E (PCG) and Edison International (EIX), the impact depends on 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 impact 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.