Could Coal Benefit from Crude Oil Prices’ Continued Fall?



Crude oil prices

Crude oil prices continued to drop during the week ended October 23. WTI crude oil prices closed at $43.65 per MMBtu (British thermal units in millions) on October 23, compared to the October 16 close of $47.26 per barrel. This implies a drop of $3.61 per MMBtu during the week. Brent crude prices dropped $3.00 per barrel during the week to $46.04 per barrel on October 23.

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Why are crude oil prices important for coal producers?

Although coal and crude oil don’t directly compete with each other as fuels, it is important for coal investors to track crude oil prices. Coal producers (KOL) like Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by crude oil prices.

Oil prices are a mixed driver for the coal industry (KOL) in the US. On one hand, energy stocks, including coal stocks, generally follow crude oil prices. A fall in crude oil prices during 2H14 led to a sell-off of energy stocks, including solar and coal stocks.

On the other hand, a drop in crude oil prices results in a drop in fuel costs for coal producers. A drop in oil prices may encourage US crude oil producers to decrease production, leading to the improved availability of the rail infrastructure to transport coal.

For most utilities (XLU), the impact of oil prices isn’t significant. Oil isn’t a major fuel that powers electricity generation throughout the US. Crude oil-fired capacities account for 11% of NRG Energy’s (NRG) total generation capacity.


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