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How Does the Natural Gas Draw-Down Impact Coal Miners?

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Sep. 23 2016, Published 9:51 a.m. ET

Natural gas inventory

Every Thursday, the EIA (U.S. 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 16, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the winter months. For the week ending September 16, the natural gas inventory came in at 3,551 Bcf (billion cubic feet)—compared to 3,499 Bcf the previous week.

This inventory figure was higher than 3,411 Bcf recorded during the same week in 2015. It was also higher than the five-year average of 3,283 Bcf. An increase of 52 Bcf in the underground natural gas inventory during the week ending September 16 was on par with analysts’ expectations.

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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 to get a sense of natural gas prices.

Natural gas inventory impacts coal

Higher natural gas inventory indicates a higher natural gas supply or lower demand for natural gas. A higher inventory usually decreases natural gas prices. A decrease in natural gas prices is negative for thermal coal producers. Utilities (XLU) tend to burn more natural gas when natural gas prices fall.

Low natural gas prices over the past few months have hurt coal producers (KOL), especially those with operations in the East and Midwest parts of the US. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ACIIQ), and Peabody Energy (BTUUQ).

In the next part, we’ll discuss what just happened with natural gas prices.

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