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How Coal Miners Could Benefit from a Higher Natural Gas Drawdown

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Natural gas prices

Henry Hub benchmark natural gas prices came in at $3.51 per MMBtu (million British thermal units) for the week ended December 23, 2016. That compares to $3.57 per MMBtu for the previous week. However, natural gas futures prices remained flat at $3.48 per MMBtu during the week.

A strong dollar on the back of the Fed’s decision to hike the interest rate and its interest rate outlook led to a broad-based sell-off in the commodities market on December 15, 2016. However, the crude oil production curtailment deal between OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC producers and a higher-than-anticipated inventory drawdown supported natural gas prices during the week ended December 29, 2016. Henry Hub benchmark natural gas spot prices closed at about $3.80 on December 29.

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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. That 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 saw 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. But a fall in natural gas prices generally leads to a fall in coal’s market share.

Impact on coal and utilities

A rise 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. However, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.

Next, let’s look at the impact of high crude oil prices on coal producers.

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