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Will Coal Producers Benefit from Sub-$50 WTI Crude Oil?

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Crude oil prices

WTI (West Texas Intermediate) crude oil prices continued to fall during the week ended July 24 and averaged below $50 a barrel for the first time in more than three months. WTI averaged $47.99 per barrel during the week compared to $50.89 during the week ended July 17.

Average Brent crude oil prices dropped $2.53 to $53.81 per barrel for the week ended July 24, compared to $56.34 a week earlier. Weak crude oil prices may force American producers to cut production.

Since oil wells also produce some natural gas, cutting oil production may also mean a drop in natural gas production, keeping everything else constant. The drop in natural gas may result in higher natural gas prices, which may benefit coal.

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Why are crude oil prices important for coal producers?

While coal and crude oil don’t directly compete with each other as fuels, it’s important for coal investors to track crude oil prices. Coal producers (KOL) like Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by falling crude oil prices.

Crude oil prices are a mixed driver for the coal industry (KOL) in the United States. On the one hand, a fall in crude oil prices results in a fall in fuel costs. Weakness in crude oil prices may encourage US crude oil producers to cut down production, pressuring freight rates. So if crude oil production falls, there would be more railcars available to transport coal. Powder River Basin–based coal producers faced severe rail availability issues in 2014.

On the other hand, a rise in oil prices leads to a rise in fuel costs for coal producers. But a rise in crude oil prices also signals positive sentiments for the overall energy sector. Energy stocks, including coal stocks, generally follow crude oil prices. The fall in crude oil prices in 2H14 pulled all energy-related stocks, including coal stocks, down.

For utilities (XLU), the impact of oil prices is not significant, since oil is not a major fuel that powers electricity generation in the United States.

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