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What Do Higher Natural Gas Futures Prices Mean for Coal?

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Natural gas prices

Henry Hub benchmark natural gas prices continued southward to $1.53 per MMBtu (one million British thermal unit) on December 24, 2015. This compares to $1.70 per MMBtu on December 18, 2015.

Interestingly, natural gas futures prices rose substantially to $2.03 per MMBtu on December 24, from $1.77 per MMBtu on December 18. However, natural gas prices remain subdued.

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Why are these indicators important?

As we all know, the shale gas boom across the United States has led to a massive rise in natural gas production. This spurred a fall in natural gas prices, and as a result, natural gas became a strong competitor of coal, particularly in 2015. Cleaner, more competitive natural gas has thus eaten away at the market share of coal in electricity generation, which is a continuing trend.

As we saw in the first part of this series, natural gas prices and coal’s market share in electricity generation are closely related. When natural gas prices fall, coal loses market share because it becomes more economical for utilities 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

So even as temperatures are dropping across the United States and electricity usage rises, 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 cost of fuel is part of tariff calculations. On the other hand, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.

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