uploads/2015/11/Part-271.png

Natural Gas Futures Drop ahead of Winter: Bad for Coal

By

Updated

Natural gas prices

Henry Hub benchmark natural gas prices saw an uptick during the week ended November 20, 2015. The benchmark natural gas price came in at $2.16 per MMBtu (one million British Thermal Units) on November 20 compared to $2.01 per MMBtu on November 13.

However, prices of natural gas futures for delivery in December dropped to $2.15 on November 20 from $2.36 on November 13. With this, the natural gas market went into backwardation. Backwardation is when the spot price of a commodity is above its futures price.

Article continues below advertisement

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 a strong competitor against coal. Cleaner and more competitive natural gas ate away the market share for coal in electricity generation, which is 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, as 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) such as Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP).

For utilities (XLU) such as 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 on long-term fixed-price contracts, subdued natural gas prices are a positive indicator.

Advertisement

More From Market Realist