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What Do Last Week’s Falling Crude Oil Prices Mean for Coal?

Oil prices drop

Both West Texas Intermediate (or WTI) and Brent crude oil prices decreased during the week ended June 19. WTI prices dropped marginally by around 35 cents per barrel to $59.61 during the week from $59.96 a barrel for the week ended June 12. Brent crude oil prices averaged $60.78 per barrel during the week of June 19, down from $62.69 for the week of June 12. WTI crude oil prices have remained range-bound at around $59–$60 per barrel over the past several weeks.

Oil prices

While coal and crude oil don’t compete with each other, it’s important for coal investors to track oil prices. Coal producers (KOL)—like Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD)—are affected by falling oil prices. These producers are affected in different ways.
Impact on coal

Crude oil prices are a mixed driver for the coal industry (KOL) in the United States. On the one hand, a fall in crude oil prices results in a fall in fuel costs. Moreover, a continued fall in crude oil prices may encourage US crude oil producers to cut down production, pressuring freight rates. If production drops, there would be more railcars available to transport coal. Powder River Basin–based coal producers faced severe rail availability issues in fiscal 2014.

On the other hand, a rise in oil prices leads to a rise in fuel costs for coal producers. A rise in oil prices also signals positive sentiment for the overall energy sector as well as the wider economy. Energy stocks, including coal stocks, generally follow crude oil prices. The drop in crude oil prices in the second half of 2014 pulled all energy stocks down.

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

source: http://marketrealist.com