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Rise in Natural Gas Inventory Affects 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 prices increase 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. Thus, natural gas inventory data are useful to get a clue on natural gas prices.

The EIA (U.S. Energy Information Administration) publishes a weekly natural gas inventory and withdrawal report every Thursday. The report is for the week ending March 20.

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Natural gas inventory rises

Throughout the year, natural gas is stored underground in order to save the fuel for peak demand during the winter. For the week ending March 20, the inventory came in at 1,479 billion cubic feet (or bcf) compared to 1,467 bcf a week earlier. It was marginally higher than Wall Street analysts’ expectation of 1,474 bcf.

The inventory figure for the week was lower than the five-year average of 1,671 bcf. However, it remained higher than last year’s 896 bcf. A severe winter in 2014 caused rapid inventory drawdown.

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 a higher or lower than expected supply. This puts pressure on natural gas prices.

Weak natural gas price is negative for thermal coal. The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially the ones with operations in the East and Midwest. These producers include Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU). Utilities (XLU) burn more natural gas when prices are low, taking away the market share in electricity generation from coal.

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