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Rising Natural Gas Inventory Makes Coal Producers Sweat

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Natural gas inventory

Every Thursday, the EIA (US Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ending August 28. Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ending August 28, inventory came in at 3,193 Bcf (billion cubic feet) compared to 3,099 Bcf a week earlier.

The inventory figure was higher than the 2,698 Bcf recorded the year before and the five-year average of 3,071 Bcf. The change of 94 Bcf in the underground inventory during the week of August 28 came in higher than Wall Street analysts’ expectation of 84 Bcf.

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Why is this report important?

Commodity prices are a function of supply and demand. If demand rises while supply remains constant, prices rise because more customers are chasing each unit of a commodity.

In contrast, if supply rises for a given level of demand, prices fall because the commodity is available in abundance. Inventory levels reflect supply and demand trends, so they’re useful for getting a sense of natural gas prices.

Impact on coal

The natural gas inventory has risen over the past 21 weeks since injection season started. A high inventory indicates a higher-than-expected supply or lower-than-expected demand. This puts pressure on natural gas prices. A fall in natural gas prices is negative for thermal coal producers, as utilities (XLU) burn less coal when natural gas prices fall. In the current low natural gas price environment, coal is losing market share to natural gas.

The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and the Midwest such as Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).

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