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Less-Than-Expected Natural Gas Inventory Good for Coal

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ended July 17.

Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ended July 17, inventory came in at 2,828 bcf (billion cubic feet) compared to 2,767 bcf a week earlier. The inventory figure was higher than 2,206 bcf the year before and the five-year average of 2,747 bcf.

The change implies an addition of 61 bcf to the underground inventory. The addition came in lower than Wall Street analysts’ expectation of an addition of 70 bcf.

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Why is this report important?

Commodity prices are a function of supply and demand. If demand rises while supply remains constant, prices rise because more customers are chasing each unit of a commodity. In contrast, if supply rises for a given level of demand, prices fall because the commodity is available in abundance.

Supply-demand trends are reflected in inventory levels. So natural gas inventory data are useful to get a sense of natural gas prices.

Impact on coal

Natural gas inventory has risen over the past few weeks, since the injection season has started. If the inventory is lower than expected, it indicates a lower-than-expected supply or a higher-than-expected demand. This pushes natural gas prices up. A rise in natural gas prices is positive for thermal coal producers, as utilities (XLU) burn more coal when natural gas prices rise.

The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and Midwest. These include Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).

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