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Natural Gas Spot Prices Drop, Futures Gain: No Good News for Coal

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Natural gas prices

After clocking gains the previous week, natural gas prices fell again during the week ended October 16. Natural gas prices in the spot market fell to $2.43 per MMBtu (British thermal units in millions) on October 16, 2015, compared to $2.50 per MMBtu on October 9. Higher-than-expected inventory, as we discussed in Part 1, was the major reason behind the fall.

Although natural gas spot prices fell, futures prices rose marginally. The natural gas front month futures price gives you an idea of the market expectations for near-term natural gas prices.

Prices rose to $2.38 per MMBtu on October 16 from $2.37 per MMBtu on October 9. However, the futures price continued to remain below spot prices. This is a phenomenon known as backwardation.

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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.

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