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How Natural Gas Prices Are Impacting Coal Producers

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Natural gas prices

The Henry Hub benchmark natural gas price came in at $3.17 per MMBtu (million British thermal units) in the week ended October 14, 2016. This price compared to $2.91 per MMBtu in the previous week. Natural gas futures prices rose to $3.27 per MMBtu in the week ended October 14, compared to $3.03 per MMBtu in the previous week.

However, higher-than-expected natural gas inventory additions week-over-week led natural gas spot prices to fall nearly 1% to $3.14 during the intraday trading session on October 20, 2016.

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Why are these indicators important?

As we know, the shale gas boom across the United States has led to a massive rise in natural gas production. This spurred a fall in natural gas prices, and as a result, natural gas became a strong competitor for coal, particularly in 2015. Cleaner, more competitive natural gas has eaten away at the market share of coal in electricity generation, which is a continuing trend.

As we discussed in the first part 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 may have a negative impact on coal producers (KOL) such as Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Natural Resources Partners (NRP).

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, pressuring unregulated power producers.

Now let’s look at crude oil prices and analyze their impact on coal producers.

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