Receding Winter Adds to Coal Producers' Woes (Part 5 of 10)
(Continued from Part 4)
Oil prices
While coal and crude oil don’t compete with each other, it’s important for investors to track oil prices. Coal producers (KOL) such as Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected by falling oil prices. The producers are affected in multiple ways.
Oil prices recover
West Texas Intermediate (or WTI) and Brent crude prices both increased during the week ending March 27. WTI prices averaged $48.58 per barrel for the March 27 week, up from $44.34 a week earlier. Brent crude prices averaged $54.51 per barrel during the March 27 week, down from $52.77 for the March 20 week.
Since Brent crude prices fell more than WTI’s, the Brent-WTI spread fell to $5.93. It was the fourth straight drop.
Impact on coal
The price of crude oil is a mixed indicator for the US coal industry (KOL). On a positive note, a rise in oil prices leads to a rise in fuel costs. On the other hand, a fall in crude oil prices results in a fall in fuel costs.
A continued fall in oil prices may encourage US producers to cut down on production, putting pressure on freight rates. If production drops, there will be more railcars available to transport coal. Coal producers based in the Powder River Basin (or PRB) faced severe rail underperformance issues in fiscal year 2014. While the situation is improving, there are still some bottlenecks.
Energy stocks, including coal, generally follow the trajectory of crude oil prices. The drop in oil prices in the second half of 2014 pulled all energy stocks down.
For utilities (XLU), the impact of oil prices is not significant, since oil is not a major fuel that powers electricity generation in the United States.
Continue to Part 6
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