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Natural Gas Drawdown Short of Expectations: What Now 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 30, 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 30, natural gas inventory came in at 3,331 Bcf (billion cubic feet) compared to 3,360 Bcf one week earlier. A fall of 49 Bcf was lower than analysts’ expectations of 82 Bcf.

That inventory figure was lower than the 3,675 Bcf recorded during the comparable week in 2015. It was also lower than the five-year average of 3,332 Bcf for the second week in a row in 2016.

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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 for getting a sense of natural gas prices.

The impact of natural gas inventory on coal

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

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).

Next, let’s take a look at what just happened with natural gas prices.

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