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Crude Oil Prices Drop—How Does This Impact Coal?

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Sep. 17 2015, Updated 9:07 a.m. ET

Crude oil prices

After rising for two straight weeks, crude oil prices dropped during the week ended September 11. WTI (West Texas Intermediate) crude oil prices closed at $44.63 per barrel during the week ended September 11, down 3.1% from the closing price of $46.05 during the week ended September 4.

Higher-than-expected crude oil inventory and Goldman Sachs’ (GS) bearish report stating that crude oil could reach as low as $20 per barrel caused the fall. The average Brent crude oil price dropped $1.27 per barrel to $47.41 per barrel as of September 11 compared to $48.68 as of September 4.

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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) such as Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by 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. A drop in crude oil prices may encourage US crude oil producers to curtail production. If crude oil production drops, availability of rail infrastructure for transportation of coal improves.

On the other hand, energy stocks, including coal stocks, generally follow crude oil prices. A rise in crude oil prices means improved investor perception of the energy sector, including coal.

For utilities (XLU), the impact of oil prices isn’t significant, as oil isn’t a major fuel that powers electricity generation throughout the United States.

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