How Lower Natural Gas Prices Could Impact Coal Producers



Natural gas prices

Henry Hub benchmark natural gas prices came in at $3.69 per MMBtu (million British thermal units) for the week ended December 30, 2016. That compares to $3.51 per MMBtu for the previous week. 

Natural gas futures prices rose nearly 8.0% to close at about $3.80 per MMBtu during the week ended December 30.

But a mild winter weather forecast led Henry Hub natural gas spot prices to fall almost 11.0% so far in 2017. On January 5, 2017, Henry Hub natural gas spot prices closed at around $3.27 per MMBtu compared to the previous week’s closing price of $3.69 per MMBtu.

Article continues below advertisement

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. It 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. 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

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.

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


More From Market Realist