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How Lower Natural Gas Prices Could Impact Coal Mining Companies

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Natural gas prices

Henry Hub benchmark natural gas prices came in at $2.50 per MMBtu (million British thermal units) for the week ended November 4, 2016, as compared to $2.72 per MMBtu in the previous week. However, natural gas futures prices marginally rose to $2.85 per MMBtu for the week ended on November 4 from $2.84 per MMBtu in the previous week.

Moreover, oversupply concerns after the release of the IEA’s (International Energy Agency) latest oil market report and a strong US dollar continued to drag commodity prices through November 11, 2016.

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Why are these indicators important?

As we all know, the shale gas boom across the United States has led to a massive rise in natural gas production. This boom has spurred a fall in natural gas prices, and as a result, natural gas became a strong competitor of 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 Part 1 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 coal for power generation. On the other hand, a fall in natural gas prices generally leads to a drop in coal’s market share.

Impact on coal and utilities

A fall in natural gas prices can have a negative impact on coal producers (KOL) such as 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, putting pressure on unregulated power producers.

In the next part of this series, we’ll look at the latest data on coal production.

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