uploads///Part

Natural Gas Fell Hard after Rising 2 Weeks: Coal Under Pressure

By

Jan. 20 2016, Updated 1:36 p.m. ET

Natural gas prices

Henry Hub benchmark natural gas prices dropped substantially to $2.18 per MMBtu (million British thermal units) on January 15, 2016. This compares to $2.47 per MMBtu on January 8, 2016. Natural gas futures prices also dropped substantially to $2.10 per MMBtu on January 15, 2016, from $2.47 per MMBtu on January 8. Lower-than-expected inventory drawdown hampered natural gas prices last week.

Article continues below advertisement

Why are these indicators important?

The shale gas boom across the United States has led to a massive rise in natural gas production. This spurred a fall in natural gas prices and as a result, natural gas became a strong competitor of coal, particularly in 2015. Cleaner, more competitive natural gas has eaten away at the market share of coal in electricity generation, which is a continuing trend.

As we saw 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

Even as temperatures are dropping across the United States 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, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.