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High Natural Gas Prices Could Benefit Coal Miners

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Natural gas prices

Henry Hub benchmark natural gas prices came in at $3.21 per MMBtu (million British thermal units) for the week ending on December 2, 2016—compared to $2.76 per MMBtu for the previous week. Natural gas futures prices also rose to $3.37 per MMBtu for the week ending on December 2, from $2.99 per MMBtu the previous week.

The marginal increase in the natural gas inventory couldn’t impact natural gas spot prices. Natural gas prices continued to rise after OPEC’s (Organization of the Petroleum Exporting Countries) agreement to cut its crude oil production. Henry Hub benchmark natural gas prices closed at a fresh 52-week high of ~$3.70 per MMBtu on December 8, 2016.

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Why are these indicators important?

As we all know, the shale gas boom across the US led to a massive rise in natural gas production. It spurred a fall in natural gas prices. As a result, natural gas became a strong competitor for coal, particularly in 2015. Cleaner and more competitive natural gas ate away at coal’s market share in electricity generation. It’s 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 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

An increase in natural gas prices can have a positive 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. It puts pressure on unregulated power producers.

In the next part, we’ll discuss how high crude oil prices impact coal producers.

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