Why natural gas prices matter
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 became a strong competitor of 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.
The great depression in natural gas prices
2015 so far has been marked by depressed energy prices. More importantly for coal (KOL), natural gas prices have been hitting new lows all through the year. Natural gas futures prices, which averaged $4.26 per million British thermal units (or MMBtu) in 2014, have averaged just $2.65 in 2015 as of December 17. To add insult to injury, natural gas futures have fallen to a 13-year low of $1.79 per MMBtu as of December 17, right at the start of winter. Cold weather boosts demand for electricity and natural gas for heating, helping coal producers as well. However, in the current weak natural gas environment, coal is on a losing streak.
Coal is losing market share to natural gas
As a result of weak natural gas prices and other regulatory factors discussed earlier in this series, coal’s market share in September 2015 dropped to 33.8% from 37.4% a year back. Moreover, market share for natural gas surpassed that of coal’s for the first time in April 2015. In 3Q15, natural gas beat coal in market share every month. The rise of natural gas is bad news for coal producers, especially the ones in the Eastern US like Alliance Resource Partners (ARLP), Peabody Energy (BTU), Arch Coal (ACI), and CONSOL Energy (CNX).