uploads/2015/12/Part-131.png

What the Dip in Natural Gas Inventory Means for Coal

By

Updated

Natural gas inventory

Every Thursday, the EIA (US Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week that ended December 4, 2015.

Throughout the year, natural gas is stored underground to save fuel for the peak demand during the cold winter. For the week that ended December 4, 2015, the natural gas inventory came in at 3,880 Bcf (billion cubic feet), compared to 3,956 Bcf a week earlier.

Article continues below advertisement

This inventory figure was higher than the 3,366 Bcf recorded last year as well as higher than the five-year average of 3,644 Bcf. However—and most notably—the drop of 76 Bcf in the underground natural gas inventory during the week that ended December 4 was even greater than the drop of 60 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 lower-than-expected natural gas inventory indicates a lower-than-expected natural gas supply—which means a higher-than-expected demand for natural gas. This generally boosts natural gas prices. And a rise in natural gas prices is generally positive 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)—especially those with operations in the East and Midwest such as Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), Arch Coal (ACI), and Peabody Energy Corporation (BTU).

But there’s more to the relationship between coal and natural gas as 2016 nears. Continue to the next part of this seven-part series for more analysis.

Advertisement

More From Market Realist