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Do Coal Miners Stand to Benefit from Natural Gas Drawdowns?

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Natural gas inventory

Every Thursday, the EIA (US Energy Information Administration) publishes a natural gas inventory report for the previous week. This series will cover the latest report for the week ending September 2, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending September 2, natural gas inventory came in at 3,437 Bcf (billion cubic feet), as compared to 3,401 Bcf one week earlier.

This inventory figure was higher than the 3,241 Bcf recorded in 2015. It was also higher than the five-year average of 3,131 Bcf. The increase of 36 Bcf in the underground natural gas inventory during the week ending September 2 was lower than the 43 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 a higher-than-expected demand for natural gas. This generally helps 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 US East and Midwest. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ACIIQ), and Peabody Energy (BTUUQ).

Now let’s take a look at what just happened with natural gas prices.

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