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How Higher Natural Gas Inventory Could 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 November 4, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending November 4, natural gas inventory came in at ~4.02 Tcf (trillion cubic feet), as compared to ~3.96 Tcf one week previously.

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This inventory figure was higher than the ~3.97 Tcf recorded during a comparable week in 2015. It was also higher than the five-year average of ~3.83 Tcf. An increase of 0.54 Tcf in the underground natural gas inventory during the week ended November 4 was higher than analysts’ expectations of 0.53 Tcf.

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 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. Any fall in natural gas prices is negative for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices are on the dip.

Natural gas prices are currently at multiyear lows, and persistently low natural gas prices over past few months have hurt coal producers (KOL), especially those with operations in the US East and Midwest. These companies include 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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