Record natural gas production may be a negative for ANR
Low natural gas prices continue to put pressure on coal (Part 2 of 12)
Natural gas production
Natural gas production is a key metric for investors. It helps determine thermal coal’s short-term outlook. Natural gas is used by the residential, commercial, industrial, transportation, and electric power segments. Residential and commercial users mainly use natural gas for heating.
Natural gas is produced throughout the year, but demand is highest during the winter. As a result, excess natural gas—that’s produced during the spring, summer, and fall—is stored underground. The excess natural gas is used during the winter.
If production increases during non-winter months and demand is stable, more natural gas goes into underground storage. This keeps natural gas prices level during the winter months.
Record production
In the US, natural gas production is rising due to the shale gas boom. In November 2014, the US produced 2.2 trillion cubic feet of natural gas—compared to 2.1 trillion cubic feet in November 2013. The year-to-date, or YTD, production increased to 23.4 trillion cubic feet—compared to 22.3 trillion cubic feet during the same period in 2013. The data is based on the EIA’s (US Energy Information Administration) publication dated January 30, 2015.
How it affects coal producers
Higher natural gas production means greater availability of natural gas. If demand for natural gas doesn’t increase at the rate of production growth, more natural gas will be available in storage. More-than-required natural gas availability will pull its prices down. This will put pressure on coal producers.
Thermal coal producers (KOL)—including Alpha Natural Resources (ANR), Arch Coal (ACI), and Peabody Energy (BTU)—will look closely at the natural gas production and storage trend. These companies also operate in the east and Midwest. Coal producers in these areas are more vulnerable to low natural gas prices—compared to the western region. The western region includes the Powder River Basin. It’s important for investors in these stocks (SPY) to follow the indicators.
In isolation, record production may not be negative for coal producers. To understand the impact on coal producers, we’ll analyze natural gas storage data.
Browse this series on Market Realist:
