Natural Gas Prices Lean Hard on Coal in Mid-December



Natural gas prices

Henry Hub benchmark natural gas prices rose marginally during the week that ended December 11, 2015. But the benchmark natural gas price dropped hard to $1.77 per MMBtu (one million British thermal units) on December 11, compared to $2.09 per MMBtu on December 4.

Prices of natural gas futures for delivery in December also dropped hard, plunging to $1.99 on December 11, 2015, from $2.19 on December 4.

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Why are these indicators important?

As we all know, the shale gas boom across the US has led to a massive rise in natural gas production. In turn, this spurred a fall in natural gas prices, and as a result, natural gas became a strong competitor against coal—particularly in 2015. In this way, cleaner and more competitive natural gas has eaten away at the market share of coal in electricity generation, which is a continuing trend.

As we discussed 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

Thus, as temperatures drop across the US and electricity usage rises, subdued natural gas prices aren’t good news for coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resource 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 the tariff calculations. On the other hand, for natural gas power plants supplying electricity on long-term fixed-price contracts, subdued natural gas prices are a positive indicator.

Meanwhile, as of mid-December, crude oil prices are dropping. What does this have to do with the prospects of coal as 2016 approaches? Continue to the next part of this series to find out.


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