Yahoo Finance How Changes in the Natural Gas Inventory Affects Coal Producers
Higher Electricity Generation Fails to Cheer Coal Producers
Natural gas inventory
Every Thursday, the EIA (US Energy Information Administration) publishes a natural gas inventory and withdrawal report for the previous week. The latest report is for the week ending June 26. Throughout the year, natural gas is stored underground in order to save the fuel for peak demand during the winter. For the week ending June 26, the inventory came in at 2,577 Bcf (billion cubic feet), compared with 2,508 Bcf a week earlier.
The pace of inventory buildup slowed during the week, as 69 Bcf of natural gas was added to the storage, compared with 75 Bcf the week before. The addition was also less than analysts’ expectations of 72 Bcf, boosting natural gas prices. Rising natural gas prices is good for coal, because coal becomes more competitive against natural gas as the latter’s price rises.
The inventory figure for the week was also higher than 1,915 Bcf the year before and the five-year average of 2,548 Bcf.
Why is this report important?
Commodity prices are a function of supply and demand. If demand rises while supply remains constant, prices rise because more customers are chasing each unit of a commodity. In contrast, if supply rises for a given level of demand, prices fall because the commodity is available in abundance.
Supply–demand trends are reflected in inventory levels. So, natural gas inventory data is useful to get a sense of natural gas prices.
Impact on coal
The natural gas inventory has risen over the past few weeks since the injection season has started. If the inventory is lower than expected, it indicates a lower-than-expected supply. This boosts natural gas prices. A rise in natural gas prices is positive for thermal coal producers, as utilities (XLU) burn more coal when natural gas prices rise.
The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and Midwest—including Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).
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