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Abundant Natural Gas Inventory Puts Pressure on Coal

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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 December 11, 2015.

Throughout the year, natural gas is stored underground to save fuel for the peak demand during the cold winter. For the week ended December 11, 2015, natural gas inventory came in at 3,846 Bcf (billion cubic feet), compared to 3,880 Bcf a week earlier.

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This inventory figure was higher than the 3,305 Bcf recorded last year as well as higher than the five-year average of 3,524 Bcf. However—and most notably—the drop of 34 Bcf in the underground natural gas inventory during the week ended December 11 was lower than the drop of 41 Bcf that analysts expected.

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 thus reflect supply and demand trends, and so they’re useful in getting a sense of natural gas prices.

The impact of natural gas inventory on coal

A higher-than-expected natural gas inventory indicates a higher-than-expected natural gas supply. This means a lower-than-expected demand for natural gas. It generally puts pressure on natural gas prices. A drop in natural gas prices is negative for thermal coal producers, because utilities (XLU) tend to burn more coal when natural gas prices rise.

For this reason, the fall in natural gas prices over the past few months has hurt coal producers (KOL). It has especially hurt 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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