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Brent crude hits $60: Why coal investors should care

Natural gas price lift good for some coal producers (Part 5 of 8)

(Continued from Part 4)

Oil prices

The drop in crude oil prices has been in the news consistently since the later half of 2014. Crude oil prices hovered over $100 per barrel in July 2014. In a span of less than six months, crude oil prices halved.

While coal and crude oil don’t compete with each other, it’s important for investors to track oil prices. Coal producers (KOL), including 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.

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You can access all major coal companies through the iShares Russell 3000 ETF (IWV).

Oil price recovery continues

Crude oil prices continued to recover during the week ending February 20. WTI (West Texas Intermediate) prices averaged $51.79 per barrel for the week, up from $51.14 per barrel during the previous week. Brent crude prices recovered to $59.76 for the week ending February 20, up from $56.83 for the week ending February 13.

The spread between WTI and Brent increased to $7.97 per barrel last week—the highest it’s been in months. The falling rig count may signal a scaling back in US crude production, which could prop up prices.

Looking at the increased spread, OPEC (Organization of the Petroleum Exporting Countries) members may benefit from production cuts in the US, as we suggested in our series, Can an award-winning movie explain falling commodity prices?.

Impact on coal

The fall of oil prices impacts coal and coal producers in multiple ways. On a positive note, fuel costs for coal producers is down. Also, falling oil prices have led to a reduction in the oil rig count.

Since oil rigs also produce natural gas, fewer oil rigs may lead to lower-than-expected natural gas output. This would increase natural gas prices. Higher natural gas prices may help coal increase its market share in electricity generation. Also, lower oil production can free up railcars for coal transportation in the Powder River Basin.

Continue to Part 6

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