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Crude Oil Falls Hard: Will Coal Producers Benefit?

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Crude oil prices

Crude oil prices fell hard during the week ended November 13, 2015. WTI (West Texas Intermediate) crude oil prices closed at $40.74 per MMBtu (one million British thermal unit) on November 13 compared to the close of $44.29 per barrel on November 6. This implies a drop of $3.55 per MMBtu during the week. Brent crude prices dropped $4.44 per barrel during the week to $42.16 per barrel on November 13.

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The EIA (U.S. Energy Information Administration) data showed that US crude oil inventory rose for the seventh consecutive period. Moreover, the International Energy Agency warned of a global supply glut in the oil market. Both these data points weighed heavily on global crude oil prices during the week ended November 13.

Why are crude oil prices important for coal producers?

Although coal and crude oil don’t directly compete with each other as fuels, it’s important for coal investors to track crude oil prices. Coal producers (KOL) such as 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 United States. On the 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 rise in crude oil prices results in a rise in fuel costs for coal producers. A rise in oil prices may encourage US crude oil producers to increase production, putting pressure on rail infrastructure available 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 United States. Crude-oil-fired capacities account for 11% of NRG Energy’s (NRG) total generation capacity.

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