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Rise in Natural Gas Prices Isn’t Enough to Lift Coal

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Natural gas prices

After falling to a three-year low, natural gas prices recovered during the week ending October 9.

Natural gas prices in the spot market rose to $2.50 per MMBtu (British thermal units in millions) on October 9, 2015—compared to $2.45 per MMBtu on October 2. Natural gas prices rose during every trading session on the expectation of higher winter demand and lower-than-expected inventory additions, as we discussed in Part 1.

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Natural gas futures prices rose with a higher magnitude. The natural gas front month futures price gives you an idea of the market expectations for near-term natural gas prices. Prices rose to $2.37 per MMBtu on October 9 from $2.26 per MMBtu on October 2. However, the futures price continued to remain below spot prices. This is a phenomenon known as “backwardation.”

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 from coal in electricity generation. This trend has continued.

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

Even after last week’s rise, natural gas prices are still subdued. This isn’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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