Coal Indicators Are in the Red—but It's Not Santa Claus
(Continued from Prior Part)
Natural gas prices
On December 18, 2015, Henry Hub benchmark natural gas prices continued southward to $1.70 per MMBtu (one million British thermal units), compared to $1.77 per MMBtu on December 11.
Prices of natural gas futures took a harder fall, plunging to $1.77 on December 18 from $1.99 on December 11, a multiyear low.
Why are these indicators important?
As we all know, the shale gas boom across the United States has led to a massive rise in natural gas production. In turn, this has spurred a fall in natural gas prices, and natural gas has become a strong competitor for coal, particularly in 2015. Cleaner, more competitive natural gas has eaten away at the market share of coal in electricity generation, which is a continuing trend.
As we saw in the first part of this series, natural gas prices and coal’s market share in electricity generation are closely related. When natural gas prices fall, coal loses market share because it becomes more economical for utilities to use natural gas for power generation. On the other hand, a rise in natural gas prices generally leads to a rise in coal’s market share.
Impact on coal and utilities
So even as temperatures drop across the United States and electricity usage rises, subdued natural gas prices aren’t good news for coal producers (KOL) such as Alliance Resource Partners (ARLP) and Natural Resources Partners (NRP).
For utilities (XLU) such as Dynegy (DYN) and NRG Energy (NRG), the impact depends on the level of regulation. For regulated utilities, the impact is generally negligible because the cost of fuel is part of the tariff calculations. On the other hand, unregulated electricity prices are falling due to weak fuel prices, putting pressure on unregulated power producers.
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