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How Does Natural Gas Drawdown Impact Coal Miners?

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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 October 21, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending October 21, natural gas inventory came in at 3,909 Bcf (billion cubic feet) compared to 3,836 Bcf one week earlier.

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This inventory figure was higher than the 3,857 Bcf recorded during the comparable week in 2015. It was also higher than the five-year average of 3,727 Bcf. An increase of 73 Bcf in the underground natural gas inventory during the week ended October 21 was on par with analysts’ expectations of 73 Bcf.

Why the EIA report is 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.

Impact of natural gas inventory on coal

A natural gas inventory on par with analysts’ expectations indicates that natural gas supply matches demand. This is considered to be neutral for natural gas prices in general.

However, the present natural gas prices are still at multiyear lows and persistent low natural gas prices over the past few months have hurt coal producers (KOL), especially those with operations in the East and Midwest regions of the US. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).

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

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