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Cheap Natural Gas, Warm Weather Are Killing Coal

10 June 2012 in Trading Ideas

Coal is on the ropes.

Total US rail shipments of coal fell to 1.55 million carloads in this year’s first quarter – the lowest level for any quarter since the beginning of 1994, the U.S. Energy Information Administration (EIA) reported on April 16.

The nation’s electricity accounts for more than 90 percent of the coal consumed in the US, according to the EIA.

Coal-fired generation at U.S. power plants, the EIA said, has fallen recently, reflecting both lower natural gas prices that have brought about competition between natural gas and coal and the mild weather that has cut the demand for home heating.

However, this dynamic is older than just the most recent winter. Rail carloads of coal peaked early in the last recession and have remained in a downtrend since late 2008, according to the EIA.

Meanwhile, natural gas prices have been hanging near 10-year lows – partly due to the recent mild weather, as news sources have widely reported, but in large part because of the massive over-supply caused by a production boom. As National Public Radio reported on  17, the entire supply-and-demand equation has been thrown out of whack in the near term from the huge rise in production. This has been spurred by new ways to extract gas out of shale rock formations (so-called fracking).

In fact, as NPR reported, producers are caught between a (shale) rock and a hard place: They’re getting hit now on prices yet it still makes economic sense to keep producing.

For lovers (or believers) in coal, however, the view isn’t all dim. As the EIA reported earlier in April, U.S. coal exports in 2011 hit their highest level in 20 years, feeding what energy analyst Gregor McDonald called the developing world’s “astonishing” growth rate of coal consumption.

How do you see current low natural gas prices changing the investment opportunity in energy stocks?