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Will Natural Gas Prices Impact Coal after Hitting a New Low?

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Oct. 27 2015, Published 11:18 a.m. ET

Natural gas prices

Natural gas prices continued to fall during the week ended October 23. Natural gas prices in the spot market fell to $2.29 per MMBtu (British thermal units in millions) on October 23, 2015, compared to $2.43 per MMBtu on October 16. Lower-than-expected natural gas inventory buildup didn’t help natural gas prices as forecasts for warmer weather more than offset the bullish inventory data.

Warmer weather before the onset of winter impacts natural gas demand for heating. Natural gas futures prices also fell during the October 23 week to $2.27 per MMBtu from $2.38 per MMBtu as of October 16.

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Why are these indicators important?

The shale gas boom led to a massive rise in natural gas production. In turn, this spurred a fall in natural gas prices. As a result, natural gas is competing hard against coal. Cleaner and more competitive natural gas ate away the market share of coal in electricity generation—a continuing trend.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices fall, coal loses market share. It becomes more economical to use natural gas for power generation. On the other hand, a rise in natural gas prices generally leads to a rise 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 Resources Partners (NRP).

For utilities (XLU) like Dynegy (DYN) and NRG Energy (NRG), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible because the fuel cost is part of the tariff calculations. For natural gas power plants supplying electricity at long-term fixed price contracts, subdued natural gas prices are a positive indicator.

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