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December 25 Natural Gas Inventory Fell Short—Good for Coal?

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Jan. 5 2016, Updated 12:16 p.m. ET

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 December 25, 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 December 25, natural gas inventory came in at 3,756 Bcf (billion cubic feet) compared to 3,814 Bcf a week earlier.

This inventory figure was higher than the 3,224 Bcf recorded last year. It was also higher than the five-year average of 3,308 Bcf. The drop of 58 Bcf in the underground natural gas inventory during the week ended December 25 was higher than the drop of 45 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, 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 or higher-than-expected demand for natural gas. This generally lifts natural gas prices. A rise in natural gas prices is positive for thermal coal producers because utilities (XLU) tend to burn more coal when natural gas prices rise.

However, 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 Resources Partners (NRP), Arch Coal (ACI), and Peabody Energy (BTU).

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