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Natural Gas Spot Prices Gets Support from Higher Inventory Drawdown

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Natural gas prices

For the week ended January 20, 2017, Henry Hub benchmark natural gas prices came in at $3.29 per MMBtu (million British thermal units), as compared to $3.28 per MMBtu in the previous week. However, natural gas futures prices rose 1.5% on a week-over-week basis and closed at $3.32 per MMBtu.

Still, this upbeat natural gas inventory drawdown continued to support the natural gas spot prices. On January 26, 2017, the Henry Hub benchmark natural gas spot prices rose ~1.5% to close at $3.38 per MMBtu, as compared to the previous day’s closing price of $3.33 per MMBtu.

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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. This spurred a fall in natural gas prices, and as a result, natural gas became a strong competitor with 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 discussed 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 drop in coal’s market share.

Impact on coal and utilities

Any 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 tariff calculations. On the other hand, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.

Now let’s explore the impact of high crude oil prices on coal producers.

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