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

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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.

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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.

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