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Natural Gas Production Fell this Injection Season: Good for Coal?

Mayur Sontakke, FRM

Monthly Indicators Suggest a Tough 2Q15 for Coal Producers

Natural gas production

The US Energy Information Administration (or EIA) published natural gas production data for April 2015 on June 30. April marks the start of injection season. In line with the past trend, natural gas production for April 2015 fell over the previous month. Natural gas production in April 2015 came in at 2.24 trillion cubic feet (or tcf) compared to 2.30 tcf in March 2015. However, the production was much higher compared to 2.05 tcf in April 2014. During the first four months of 2015, natural production came in at 8.90 tcf against 8.15 tcf during the same period in 2014.

Why is this important?

Natural gas production is a key metric for coal company investors. It helps determine the outlook for thermal coal prices and demand in the short term. Natural gas is used by the residential, commercial, industrial, transportation, and electric power segments. Residential and commercial users mainly use it for heating.

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Natural gas is produced throughout the year, but demand is highest during winter. As a result, excess natural gas that’s produced during spring, summer, and fall is stored underground. The excess natural gas is used during the winter.

The U.S. Energy Information Administration publishes natural gas production data monthly.

Impact on coal

Although the rig count is on a downturn, US natural gas production is rising year-over-year. Rising natural gas production means an increase in the availability of natural gas, pressuring natural gas prices. Subdued natural gas prices are negative for coal (KOL), as they pressure coal prices as well. While coal is the cheapest fossil fuel, weak natural gas prices make it more competitive against coal. Coal producers including—Peabody Energy (BTU), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Alpha Natural Resources (ANR)—are already battling multi-year low coal prices. Rising natural gas production makes matters worse for these companies.

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