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Higher-than-Expected Natural Gas Inventory Pressures Coal

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ended October 9.

Throughout the year, natural gas is stored underground to save the fuel for the peak demand during the winter. For the week ended October 9, the natural gas inventory came in at 3,733 Bcf (billion cubic feet) compared to 3,633 Bcf a week earlier.

The inventory figure was higher than 3,286 Bcf recorded the year before and the five-year average of 3,565 Bcf. The change of 100 Bcf in the underground inventory during the week ended October 9 came in higher than the 93 Bcf anticipated by Wall Street analysts.

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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 25 weeks since the injection season started. A higher-than-expected inventory indicates 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 because utilities (XLU) burn less coal when natural gas prices fall.

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

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