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Natural Gas Pricing Remains Weak, Coal under Pressure

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Natural gas prices

Henry Hub benchmark natural gas prices dropped again during the week ended November 13, 2015. The benchmark natural gas price came in at $2.01 per MMBtu (one million British Thermal Units) on November 13 compared to $2.17 per MMBtu on October 30.

Natural gas futures prices for December delivery dropped marginally to $2.36 per MMBtu on November 13, from $2.37 on November 6.

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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 a strong competitor against coal. Cleaner and more competitive natural gas ate away the market share of 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 Resources 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.

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