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Recent collapse in natural gas raises odds of US coal displacement next year

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Recent collapse in natural gas raises odds of US coal displacement next year

Firmer natural gas prices through most of 2017 helped coal generators to clear surplus inventories and operate at closer to normal levels. Through October, Henry Hub spot prices ranged from $2.90/MMBtu to $3.20/MMBtu, creating a correspondingly stable range for spot coal prices.

Natural gas futures strip is pointing down so far this winter

This stability in prices appears likely to change next year. If heating season demand comes in lower than expected, those excess natural gas volumes will be pushed over to the power sector in the form of lower prices for natural gas. While the peak natural gas heating season of January-February is still to come, NYMEX futures pricing for those months at $2.75/MMBtu signals the possibility of substantially lower natural gas prices in 2018 than we saw last winter.

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Henry Hub spot prices have remained close to $3/MMBtu for the last several months, despite tightening storage levels. However, since November prices have weakened due to the slow arrival of winter weather in the Northeast and Midwest.

At the same time, improved demand for domestic coal and stronger international markets have moved current and prompt-year benchmark coal prices higher. Suppliers need this price growth to restore financial health following the low demand period from 2015-2016. However, increasing prices for 2018 in the face of a downward price trend for natural gas is likely to result in lost volumes, as natural gas plants again displace coal at the busbar.

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Nearly 50 million tons of coal demand at risk of displacement

If current forward pricing for coal and natural gas holds, spreads will move against bituminous coal by 46 cents per MMBtu, and against subbituminous coal by 33 cents per MMBtu. S&P Global Market Intelligence estimates that these movements could displace 20 million tons of bituminous coal and 27 million tons of subbituminous coal during 2018. Persistent low natural gas prices would therefore burden a market already facing an estimated 42 million tons of lost demand due to coal retirements next year.

Cold winter weather may yet ensure that natural gas does not flow at current strip prices. Prices above $3.10/MMBtu for 2018 would likely allow stable demand from coal plants at current coal prices. But the current natural gas futures strip indicates that direct competition between coal and natural gas remains a feature of power markets for the foreseeable future, with coal demand especially vulnerable to the price of natural gas.