What the EIA's Energy Report for June 2015—and Low Coal Inventories—Could Mean for Coal and Natural Gas
Natural gas production
On July 31, 2015, the EIA (US Energy Information Administration) published the natural gas production data for June 2015. In line with the past trend, natural gas production fell over the previous month.
Natural gas production in June 2015 came in at 2.24 tcf (trillion cubic feet), compared to 2.29 tcf in May 2015. However, production was still higher than in June 2014, when it came in at 2.10 tcf.
During 1H15, natural gas production came in at 13.42 tcf, compared to 12.39 tcf during the same period in 2014.
Why it matters
Natural gas production is a key metric for coal company investors because 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 sectors. Residential and commercial users use it mainly for heating.
The EIA publishes natural gas production data monthly. Natural gas is produced throughout the year, but demand is highest during winter. As a result, the excess natural gas that’s produced during spring, summer, and fall is stored underground to meet the higher winter demands.
Impact on coal
Year-over-year natural gas production in the US is steadily rising. Rising natural gas production means an increase in the availability of natural gas, which pressures natural gas prices. Subdued natural gas prices are negative for coal, as well as for related funds like the Market Vectors-Coal ETF (KOL), as low natural gas prices pressure coal prices.
For various natural gas companies’ market exposure, check out the First Trust ISE Revere Natural Gas ETF (FCG).
While coal is the cheapest fossil fuel, weak natural gas prices make natural gas more competitive. And major coal producers—companies like Peabody Energy Corporation (BTU), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Arch Coal (ACI)—are already battling multi-year low coal prices.
In the next part of this series, we’ll look at the market shares of both coal and natural gas.
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