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Fall in Natural Gas Prices Keeps Coal under Pressure

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Jul. 28 2015, Published 4:26 p.m. ET

Natural gas prices

In spite of the lower-than-expected inventory addition, natural gas prices fell marginally during the week ended July 24 as inventories remained elevated, surpassing the five-year average.

Henry Hub benchmark natural gas prices came in at $2.82 per MMBtu (million British thermal units) on July 24 compared to $2.84 on July 17.

Natural gas front month futures price, which gives an idea of market expectations for near-term natural gas prices, fell to $2.78 per MMBtu on July 24 compared to $2.87 per MMBtu on July 17. This implies that the markets expect natural gas prices to fall further.

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Why are these indicators important?

The shale gas boom led to a massive rise in production of natural gas, which in turn spurred a drop in natural gas prices. As a result, natural gas became a competing fuel for coal. Cleaner, more competitive natural gas ate away market share from coal in electricity generation. It continues to do so.

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 fall in coal’s market share because natural gas is available at cheaper rates.

Impact on coal and utilities

A fall in natural gas prices is negative for coal producers (KOL) like Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP). With a drop in price, natural gas becomes relatively cheaper, making utilities prefer burning natural gas over coal and putting pressure on coal producers.

For utilities (XLU) like PG&E (PCG) and Edison International (EIX), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible, as the fuel cost is a part of their tariff calculation. Natural gas–fired power plants supplying electricity at fixed price contracts benefit from the fall in natural gas prices.

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