Natural gas prices
Henry Hub benchmark natural gas prices came in at $2.76 per MMBtu (million British thermal units) for the week ending on November 25, 2016—compared to $2.44 per MMBtu the previous week. Natural gas futures prices also rose to $2.99 per MMBtu for the week ending on November 25—compared to $2.75 per MMBtu the previous week.
Natural gas prices shrugged off the higher-than-anticipated natural gas inventory report on December 1, 2016, on the backdrop of OPEC’s (Organization of the Petroleum Exporting Countries) agreement on crude oil production curtailment. The Henry Hub benchmark natural gas prices closed at a fresh 52-week high of $3.50 per MMBtu on December 1, 2016.
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, 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 use 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
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 analyze the sharp rally that we saw in crude.