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Massive Natural Gas Drawdown Didn’t Help Coal

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ended January 8, 2015.

Throughout the year, natural gas is stored underground to save fuel for the peak demand during the cold winter months. For the week ended January 8, natural gas inventory came in at 3,475 Bcf (billion cubic feet) compared to 3,643 Bcf a week earlier.

This inventory figure was higher than the 2,888 Bcf recorded last year. It was also higher than the five-year average of 3,001 Bcf. The drop of 168 Bcf in the underground natural gas inventory during the week ended January 8 was lower than the drop of 175 Bcf that analysts expected.

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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 reflect supply and demand trends, so they’re useful in getting a sense of natural gas prices.

The impact of natural gas inventory on coal

Higher-than-expected natural gas inventory indicates higher-than-expected natural gas supply or lower-than-expected demand for natural gas. This generally puts pressure on natural gas prices. A fall in natural gas prices is negative for thermal coal producers because utilities (XLU) tend to burn more natural gas when prices rise.

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. Some of these companies are Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), Arch Coal (ACIIQ), and Peabody Energy (BTU).

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