What Does a Recovery in Crude Oil Prices Mean for Coal?
Natural Gas and Crude Oil Rise, Eastern Coal Falls
Crude oil prices
Crude oil prices saw a substantial recovery during the week ending October 9.
WTI (West Texas Intermediate) crude oil prices rose by over $4 per MMBtu (British thermal units in millions). During the week, the highlight for WTI was legislation being passed by the House of Representatives. It allowed US crude oil exports. A ban on US crude oil exports was instituted in the 1970s. The continued falling rig count eased the oversupply concerns. This supported WTI crude oil prices.
Brent crude prices rose by $4.62 per barrel to $52.03 per barrel on October 9. Optimism around the recovery in global oil prices drove Brent crude oil prices upwards.
Why are crude oil prices important for coal producers?
While coal and crude oil don’t directly compete with each other as fuels, it’s important for coal investors to track crude oil prices. Coal producers (KOL) like Alliance Resource Partners (ARLP), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD) are affected in various ways by crude oil prices.
Oil prices are a mixed driver for the coal industry (KOL) in the US. On one hand, energy stocks, including coal stocks, generally follow crude oil prices. A rise in crude oil prices means an improved investor perception of the energy sector, including coal.
On the other hand, a rise in crude oil prices results in a rise in fuel costs for coal producers. A rise in oil prices may encourage US crude oil producers to increase production. If crude oil production rises, the availability of rail infrastructure for coal transportation takes a hit.
For most utilities (XLU), the impact of oil prices isn’t significant. Oil isn’t a major fuel that powers electricity generation throughout the US.
Browse this series on Market Realist: