Coal news and updates

Natural Gas Prices Fall, Put Pressure on Coal

Natural gas prices

After rising the previous week, natural gas prices fell again during the week ended July 10. Front month contracts closed at $2.77 per MMBtu (million British thermal units) on July 10, down from $2.822 on July 2.

Henry Hub benchmark natural gas prices came in at $2.75 per MMBtu on July 10 compared to $2.79 on July 2. Markets were closed on Friday, July 3, for the Fourth of July weekend.

Prices fell heavily until Wednesday, July 8 on mild weather forecasts. However, prices rose on Thursday and Friday in spite of higher-than-expected natural gas inventory, as we saw in the previous part of this series. This was due to the expectation of warmer weather in the West and Midwest. Warmer weather leads to higher demand for electricity for air conditioning.

Why are these indicators important?

The shale gas boom led to a massive rise in production of natural gas, which in turn spurred a drop in prices. As a result, natural gas became a competing fuel for coal. Cleaner, more competitive natural gas ate away market share from coal in electricity generation. It continues to do so.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices rise, coal gains market share. It becomes more economical to burn coal for power generation. A fall in natural gas prices generally leads to a fall in coal’s market share because natural gas is available at cheaper rates.
Impact on coal and utilities

A fall in natural gas prices is negative for coal producers (KOL) like Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP). With a fall in price, natural gas becomes relatively cheaper, making utilities prefer burning natural gas over coal. Natural gas surpassed coal’s market share in electricity generation in April 2015.

For utilities (XLU) like PG&E (PCG) and Edison International (EIX), the impact depends on the level of regulation. If their contracts are strictly on a cost-plus basis and they get a fixed return over and above costs, the impact is not significant. For utilities with fixed-price contracts in which they get a fixed price regardless of changes in input costs, the drop in natural gas prices is positive.

source: http://marketrealist.com