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Analyzing the Impact of the Natural Gas Drawdown on Coal Miners

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Dec. 4 2020, Updated 10:53 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 covers the latest EIA report for the week ended September 30, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ended September 30, the natural gas inventory came in at 3,680 Bcf (billion cubic feet) compared to 3,600 Bcf in the previous week.

This inventory figure was higher than the 3,606 Bcf recorded during the comparable week in 2015. It was also higher than the five-year average of 3,475 Bcf.

An increase of 80 Bcf in the underground natural gas inventory during the week ended September 30 was higher than analysts’ expectations of 70 Bcf.

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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, making them useful in getting a sense of natural gas prices.

The impact of natural gas inventory on coal

A higher-than-expected natural gas inventory indicates a higher-than-expected natural gas supply or lower demand for natural gas. This generally has a negative impact on natural gas prices. A decrease in natural gas prices is negative for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices fall.

Moreover, the current natural gas prices are still at multiyear lows. The persistently low natural gas prices over the past few months have 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, Westmoreland Coal (WLB), and Peabody Energy (BTUUQ).

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

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