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How Did Last Week’s Natural Gas Prices Impact Coal?

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Natural gas prices

The week ended September 11 started with the Labor Day holiday, making it a short week for the equities and commodities markets, with just four trading sessions. During the short week, natural gas spot prices partially recovered from the previous week’s fall.

Natural gas prices in the spot market increased to $2.69 per million British thermal units (or MMBtu) on September 11 compared to $2.66 per MMBtu on September 4. The EIA’s natural gas inventory report, which we discussed in Part 1, lifted the prices on Thursday as the inventory came in lower than expected.

While spot prices increased, natural gas futures prices dropped. The natural gas front month futures price gives you an idea of market expectations for near-term natural gas prices. It dropped marginally to $2.66 per MMBtu on September 11 from $2.67 per MMBtu on September 4.

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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 is competing hard against 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 drop, coal loses market share, as it becomes more economical to use natural gas for power generation. On the other hand, a rise in natural gas prices generally leads to an increase in coal’s market share.

Impact on coal and utilities

Even after the rise, natural gas prices continue to remain subdued. This would not be good news for coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP).

For utilities (XLU) such as 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 calculations. For natural gas power plants supplying electricity at fixed price contracts, subdued natural gas prices are a positive.

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