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Natural Gas Prices Drop in Early April, Putting Pressure on Coal

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Natural gas prices

The US 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 terms of electricity generation.

Natural gas prices and coal’s share of the electricity generation market 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.

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Week ending April 3

Despite lower-than-expected inventory, natural gas prices slid during the week ending April 3. The Henry Hub benchmark price dropped to $2.61 per MMBtu (British thermal units in millions), down from $2.69 a week earlier.

During the same period, front month contract prices dropped to $2.65 per MMBtu over $2.76 per MMBtu a week earlier.

Impact on coal and utilities

A drop in natural gas prices is negative for coal producers (KOL) such as Alpha Natural Resources (ANR) and Arch Coal (ACI) because natural gas becomes cheaper than coal as a fuel for electricity generation.

For utilities (XLU) such as PG&E (PCG) and Southern California Edison (EIX), the impact depends on the level of regulation. If contracts are negotiated strictly on a cost-plus basis—where the companies 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.

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