uploads/2015/10/PArt-31.png

Crude Oil Prices Fall: What Does It Mean for Coal?

By

Updated

Crude oil prices

After recovering the previous week, crude oil prices dropped during the week ended October 16. WTI (West Texas Intermediate) crude oil prices fell by ~$2.40 per barrel.

WTI crude oil prices closed at $47.26 per MMBtu on October 16 compared to the October 9 close of $49.63 per barrel. Brent crude prices dropped $2.99 per barrel to $49.04 per barrel on October 9.

Article continues below advertisement

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.

Advertisement

More From Market Realist