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Lower-Than-Expected March Natural Gas Inventory Is Good for Coal

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Natural gas inventory

Commodity prices are a function of demand and supply. If demand increases while supply remains constant, the price increases 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. This is why natural gas inventory data are useful for estimating natural gas prices.

The EIA (U.S. Energy Information Administration) publishes a weekly natural gas inventory and withdrawal report every Thursday. The most recent report is for the week ending March 27.

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Natural gas inventory drops after a small rise

Throughout the year, natural gas is stored underground in anticipation of peak demand during the winter. For the week ending March 27, inventory came in at 1,461 Bcf (billion cubic feet), marginally lower than Wall Street analysts’ expectation of 1,474 Bcf. The week before, inventory had been 1,479 Bcf.

Inventory for the week was lower than the five-year average of 1,640 Bcf but higher than last year’s 822 Bcf. A severe winter in 2014 caused steep inventory drawdowns.

Impact on coal

A rise in natural gas inventory points toward the end of winter. If inventory is higher or lower than expected, it indicates higher- or lower-than-expected supply, which puts pressure on natural gas prices to move in one direction or the other.

A weak natural gas price is negative for thermal coal (KOL). Falling natural gas prices during the last few months have hurt coal producers, especially the ones with operations in the East and Midwest including Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU). Utilities (XLU) burn more natural gas when prices are low, which reduces the market share for coal in electricity generation.

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