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Natural Gas Drawdown Beats Estimates: What’s Next for Coal?

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. In this series, we’ll take a look at the latest report for the week ended December 9, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ended December 9, natural gas inventory was 3,806 Bcf (billion cubic feet) compared to 3,953 Bcf one week earlier.

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This inventory figure was lower than the 3,856 Bcf recorded during the comparable week in 2015. However, it was higher than the five-year average of 3,620 Bcf. A fall of 147 Bcf in underground natural gas inventory during the week that ended December 9 was higher than analysts’ expectations of 128 Bcf.

Why is the EIA report 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, so they’re useful in getting a sense of natural gas prices.

The impact of natural gas inventory on coal

A lower-than-expected natural gas inventory indicates a lower-than-expected natural gas supply or a higher demand for natural gas. In general, that has a positive impact on natural gas prices. A rise in natural gas prices is positive for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices have fallen.

However, the current natural gas prices are still at multiyear lows. Persistent low natural gas prices over the past few months have hurt coal producers (KOL), especially those with operations in the Eastern United States and the Midwest. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).

In the next part, let’s take a look at what just happened with natural gas prices.

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