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WTI Crude Oil at a Premium: Does It Matter to Coal Producers?

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Jan. 6 2016, Updated 8:05 p.m. ET

Crude oil prices recover

Crude oil prices recovered during the week ended December 24, 2015. WTI (West Texas Intermediate) crude oil prices closed at $37.50 per MMBtu (one million British thermal units) on December 24 compared to the closing price of $34.70 per barrel on December 18.

Meanwhile, Brent crude prices increased to $36.49 per barrel during the week ended December 24, up from $35.05 as of December 18. WTI closed at a premium over Brent for the first time since 2010 on a sustained basis.

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Why crude oil prices matter to coal producers

Although coal and crude oil don’t directly compete with each other as fuels, it’s still important for coal investors to track crude oil prices. Coal producers (KOL) such as Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by crude oil prices.

In this sense, oil prices are a mixed driver for the coal industry (KOL) in the United States. On the one hand, energy stocks, including coal stocks, generally follow crude oil prices. For example, the fall in crude oil prices during the second half of 2014 led to a sell-off of energy stocks, including solar and coal stocks.

On the other hand, a drop in crude oil prices results in a drop in fuel costs for coal producers. A drop in oil prices may encourage US crude oil producers to decrease production, making rail infrastructure available to transport coal.

Key takeaways

For most utilities (XLU), the impact of oil prices isn’t significant. Oil isn’t a major fuel that powers electricity generation throughout the United States. For example, crude-oil-fired capacities account for 11% of NRG Energy’s (NRG) total generation capacity.

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