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What Do Last Week’s Volatile Natural Gas Prices Mean for Coal?

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Natural gas prices

Natural gas prices remained volatile during the week ending August 28. On Monday, August 24, they fell by ~1% due to the expectation of cooler temperatures, leading to lower demand for natural gas for cooling. Prices rose for the next two days on the MDA Weather Services’ forecasts of above-normal temperatures.

Prices fell by over 2% on Thursday, August 27, as the inventory report discussed in Part 1 revealed that natural gas inventories increased more than expected during the week ending August 21. Natural gas prices recovered on Friday, closing the week at $2.72 per million British thermal units (or MMBtu) compared to August 21’s closing of $2.68 per MMBtu.

While spot prices increased during the week ending August 28, 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 to $2.66 per MMBtu on August 28 compared to $2.70 per MMBtu on August 21.

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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 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 rise, coal gains market share, as it becomes more economical to burn coal for power generation. On the other hand, a drop in natural gas prices generally leads to a fall in coal’s market share.

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 calculations. For natural gas power plants supplying electricity at fixed price contracts, subdued natural gas prices are a positive.

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