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What Do Volatile Natural Gas Prices Mean for Coal?

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Natural gas prices

After rising through August 12, natural gas prices gave up their gains on August 13 after the US Energy Information Administration (or the EIA) published the natural gas inventory report that we discussed in the first part of this series. Expectations of warmer weather in Texas and the East Coast, major demand centers for natural gas, drove natural gas prices up to August 12. They hit $2.93 per MMBtu (million British thermal units) on August 12. However, higher-than-expected inventories pulled the price down to $2.79 per MMBtu on August 13. Prices ended at $2.801 per MMBtu on August 14, marginally up from $2.798 per MMBtu on August 7.

The natural gas front month futures price gives you an idea of market expectations for near-term natural gas prices. It rose to $2.83 per MMBtu on August 14 compared to $2.80 per MMBtu on August 7.

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Why are these indicators important?

The shale gas boom led to a massive rise in natural gas production, 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, and this trend has continued.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices rise, coal gains market share, as 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

Subdued natural gas prices aren’t good news for coal producers (KOL) like Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP).

For utilities (XLU) like Dynegy Corporation (DYN) 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 part of their tariff calculation. For natural gas power plants supplying electricity at fixed price contracts, subdued natural gas prices are a positive.

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