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How Does Natural Gas Drawdown Impact Coal Miners?

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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 October 7, 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 7, the natural gas inventory came in at 3,759 Bcf (billion cubic feet) compared to 3,680 Bcf one week earlier.

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This inventory figure was higher than the 3,703 Bcf recorded during the comparable week in 2015. It was also higher than the five-year average of 3,567 Bcf. An increase of 79 Bcf in the underground natural gas inventory during the week ended October 7 was lower than analysts’ expectations of 87 Bcf.

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 higher demand for natural gas. This generally has a positive impact on natural gas prices. An increase in natural gas prices is positive for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices are lower.

However, 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 US East and Midwest like Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).

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

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