Natural Gas Prices Rise, but Not Enough to Boost Coal



Natural gas prices

Henry Hub benchmark natural gas prices came in at $3.02 per MMBtu (million British thermal units) for the week ending September 16, 2016. This compares to $2.87 per MMBtu for the previous week. Natural gas futures prices also rose to $2.92 per MMBtu for the week ending September 16, from $2.75 per MMBtu for the previous week.

However, the rise in the natural gas inventory week-over-week caused natural gas spot prices to fall nearly 2% on NYMEX. The prices closed at $2.98 on September 22, 2016.

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Why are these indicators important?

As we all know, the shale gas boom across the US led to a massive rise in natural gas production. This spurred a fall in natural gas prices. As a result, natural gas became a strong competitor for coal—particularly in 2015. Cleaner and more competitive natural gas ate away at coal’s market share in electricity generation—a continuing trend.

As we saw in Part 1 of this series, natural gas prices and coal’s market share in electricity generation are closely related. When natural gas prices rise, coal gains market share because it becomes more economical for utilities to use coal for power generation. On the other hand, a fall in natural gas prices generally leads to a fall in coal’s market share.

Impact on coal and utilities

A fall in natural gas prices can have a negative impact on coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resources Partners (NRP). The current prices are still at multiyear lows.

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.

In the next part, we’ll analyze the continued recovery in crude.


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