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How Will the Rebound in Crude Oil Prices Impact US Coal?

Crude oil prices

WTI (West Texas Intermediate) crude oil prices increased again during the week ended September 25. WTI closed at $45.70 per barrel during the week, up $1.02 from the previous week’s close. Better-than-expected US GDP (gross domestic produce) figures lifted the demand outlook, which lifted crude oil prices.

Brent crude oil prices rose $0.52 per barrel to $46.15 per barrel on September 25, further narrowing the spread between WTI and Brent.

Why are crude oil prices important for coal producers?

While coal and crude oil don’t directly compete with each other as fuels, it’s important for coal investors to track crude oil prices. Coal producers (KOL) such as Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by crude oil prices.

Crude oil prices are a mixed driver for the coal industry (KOL) in the United States. On the one hand, energy stocks, including coal stocks, generally follow crude oil prices. A rise in crude oil prices means improved investor perception of the energy sector, including coal.

On the other hand, a fall in crude oil prices results in a fall in fuel costs. A drop in crude oil prices may encourage US crude oil producers to curtail production. If crude oil production drops, availability of rail infrastructure for transportation of coal improves.

For most utilities (XLU), the impact of oil prices isn’t significant, as oil isn’t a major fuel that powers electricity generation throughout the United States.

source: http://marketrealist.com