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Natural Gas Inventory Tops Expectations: Bad for Coal

Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory and withdrawal report for the previous week. The latest report is for the week ended July 3.

Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ended July 3, inventory came in at 2,668 bcf (billion cubic feet) compared to 2,577 bcf a week earlier. The inventory figure was higher than 2,009 bcf the year before and the five-year average of 2,623 bcf.

The change implies an addition of 91 bcf to the underground inventory. The addition came in higher than Wall Street analysts’ expectation of 86 bcf.

Why is this 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.

Supply-demand trends are reflected in inventory levels. So natural gas inventory data are useful to get a sense of natural gas prices.
Impact on coal

Natural gas inventory has risen over the past few weeks since the injection season has started. If the inventory is higher than expected, it indicates a higher-than-expected supply. This pressures natural gas prices. A fall in natural gas prices is negative for thermal coal producers, as utilities (XLU) burn more natural gas when natural gas prices fall.

The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and Midwest. These include Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).

source: http://marketrealist.com