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Will the Recovery in Crude Oil Prices Affect US Coal?

Crude oil prices

After falling for eight straight weeks, WTI (West Texas Intermediate) crude oil prices finally rose during the week ending August 28. WTI prices averaged at $45.22 per barrel during the week ended August 28, up 12.3% from an average of $40.24 during the week ending August 21. This was the highest percentage weekly gain in WTI prices since March 2009. A better-than-expected 2Q15 US GDP and other global developments supported WTI prices.

The average Brent crude oil price gained around $4.00 to $48.27 per barrel for the week ended August 28. Tensions in the Middle East and lower production in Nigeria contributed to the spike.

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) like 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 US. On one hand, a rise in crude oil prices results in a rise in fuel costs. An increase in crude oil prices may encourage US crude oil producers to ramp up production. If crude oil production rises, there would be fewer railcars available to transport coal. Coal producers based in the Powder River Basin faced severe rail availability issues in 2014.

On the other 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.

For 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