Natural gas prices have been rising, getting to around $2.75/thousand cubic feet last week before falling back a little to around $2.69. At this level, coal once again enters the picture, as prices for the two fuels approach equilibrium.
Natural gas producers like Exxon Mobil Corp. (NYSE: XOM), Chesapeake Energy Corp. (NYSE: CHK), and EOG Resources Inc. (NYSE: EOG) have slowed production in an effort to get gas prices to rise. Coal producers like Consol Energy Inc. (NYSE: CNX), Peabody Energy Corp. (NYSE: BTU), Alpha Natural Resources Inc. (NYSE: ANR), and Arch Coal Inc. (NYSE: ACI) have also cut production, but in their case the effort was to reduce costs.
Natural gas inventories remain high, though off by about 13% from their peak in March. Lower injections into storage have helped, as have warmer temperatures in some parts of the country. But temperatures are expected to moderate and the forecast for summer does not include long periods of high temperatures. That means that natural gas inventories will enter the traditional winter drawdown period beginning in October with above average inventories again. Inventories need to drop by more than 500 billion cubic feet by the end of summer or there won’t be any place to put new production. The early estimate for inventory growth this week calls for 67-88 billion cubic feet to be added to already bulging stocks.
As for the coal producers, they could continue to get squeezed at natural gas price below $3.00 because generation plants that have switched to gas won’t want to switch back until they are sure that gas prices are going to remain elevated. Utility companies will drive a hard bargain on coal pricing until it’s clear that gas prices are going to remain high.
The recent modest increase in natural gas prices is not going have much impact coal production unless the price hike gets above about $3/thousand cubic feet and stays there. That does not appear likely at this point.
Paul Ausick
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