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How Natural Gas Drawdowns 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 ended September 23, 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 23, natural gas inventory came in at 3,600 Bcf (billion cubic feet) compared to 3,551 Bcf one week earlier.

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This inventory figure was higher than the 3,510 Bcf recorded during the comparable week in 2015. It was also higher than the five-year average of 3,380 Bcf. An increase of 49 Bcf in the underground natural gas inventory during the week ended September 23 was lower than analysts’ expectations of 55 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, making them 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 less natural gas when natural gas prices are on the rise.

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 US East Coast and Midwest. These companies include Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ACIIQ), and Peabody Energy (BTUUQ).

Next, let’s take a look at the most recent natural gas prices.

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