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Will Natural Gas Inventory Help Coal Producers?

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ended October 23, 2015.

Throughout the year, natural gas is stored underground to save fuel for the peak demand during the winter. For the week ended October 23, natural gas inventory came in at 3,877 Bcf (billion cubic feet) compared to 3,814 Bcf a week earlier.

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The inventory figure was higher than 3,468 Bcf recorded the year before and the five-year average of 3,724 Bcf. The change of 63 Bcf in the underground inventory during the week ended October 23 was lower than analysts’ expectation of 70 Bcf. The natural gas inventory figure lagged for the second straight week.

Why is the EIA report important?

Commodity prices are a function of supply and demand. If demand rises while supply remains constant, prices rise because more customers are chasing each unit of a commodity.

In contrast, if supply rises for a given level of demand, prices fall because the commodity is available in abundance. Inventory levels reflect supply-and-demand trends, so they’re useful for getting a sense of natural gas prices.

Impact on coal

Natural gas inventory has risen over the past 26 weeks since the injection season started. A lower-than-expected inventory indicates lower-than-expected supply or higher-than-expected demand. This generally boosts natural gas prices. A rise in natural gas prices is positive for thermal coal producers because utilities (XLU) burn more coal when natural gas prices rise.

The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and Midwest such as Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ACI), and Peabody Energy (BTU).

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