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US Coal under Pressure as Natural Gas Prices Fall Again

Natural gas prices

Natural gas prices ended the September 4 week in red. The gains gathered through Wednesday, September 2, were wiped away after the bearish natural gas inventory report (discussed in part 1) was published on Thursday, September 3.

Natural gas prices in the spot market fell to $2.66 per million British thermal units (or MMBtu) on September 4 compared to $2.72 per MMBtu on August 28. While spot prices dropped, natural gas futures prices increased. The natural gas front month futures price gives you an idea of market expectations for near-term natural gas prices. It increased marginally to $2.67 per MMBtu on September 4 from $2.66 per MMBtu on August 28.

Why are these indicators important?

The shale gas boom led to a massive rise in natural gas production, which in turn spurred a drop in natural gas prices. As a result, natural gas is competing against coal. Cleaner, more competitive natural gas ate away market share from coal in electricity generation, and this trend has continued.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices drop, coal loses market share, as it becomes more economical to use natural gas for power generation. On the other hand, a rise in natural gas prices generally leads to an increase in coal’s market share.
Impact on coal and utilities

Subdued natural gas prices aren’t good news for coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP).

For utilities (XLU) such as Dynegy Corporation (DYN) and Edison International (EIX), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible, as the fuel cost is part of their tariff calculations. For natural gas power plants supplying electricity at fixed price contracts, subdued natural gas prices are a positive.

source: http://marketrealist.com