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Analyst: Higher gas prices, low stockpiles could bring volatility to coal in H2

Natural gas prices are likely to climb above $3/MMBtu this fall and coal inventories are projected to end the year at 105 million tons, according to a prominent U.S. coal analyst.

Andy Blumenfeld, with Doyle Trading Consultants, said that increased gas exports to Mexico, a doubling of LNG exports by the end of the year and higher demand for gas for power generation should push the Henry Hub price out of its sub $3/MMBtu range.

Blumenfeld spoke Aug. 7 at the annual Coal Market Strategies conference hosted by the American Coal Council in New Mexico.

Other than two short-lived rallies in the late fall and early winter of 2017 that pushed the front-month NYMEX Henry Hub natural gas futures contract briefly over $3/MMBtu, the price has averaged $2.88/MMBtu since July 1 of last year.

"That $3[/MMBtu] mark is about what you need to move coal," Blumenfeld said. "Above $3.50[MMBtu] could see a significant amount of coal demand pick up. We are dancing on that knife's edge right now."

Blumenfeld also noted that power demand is significantly up this year, which is one reason gas inventories are running nearly 20% below the five-year average.

Through May, according to the most recent data from the U.S. Energy Information Administration, U.S. power generation is up 4.7% from the same period last year, and up 2% when compared with the five-year average for the January-May period.

Blumenfeld said the EIA is estimating gas storage will end the injection season on Oct. 31 at roughly 3.5 Tcf, which would be among the lowest totals in the last decade. Storage peaked at 3.79 Tcf last year, and 4.04 Tcf in 2016.

Blumenfeld also said "markets do matter," and that operators in any extractive industry tend to overproduce in anticipation of demand that doesn't always show up. He cautioned that might also be the case for the U.S. gas market.

According to S&P Global Platts Analytics, gas production has climbed to more than 80 Bcf/d from roughly 72 Bcf/d at the this time last year.

"We are setting up a situation for why we might start to see gas prices drift higher, and that sets up an interesting dynamic on the coal side," Blumenfeld said.

Blumenfeld noted that U.S. coal production is down this year, which is also helping to draw down coal stockpiles. He said he is forecasting year-end national storage of 105 million tons, which would be a historically low number but would equal roughly 60 days of burn, roughly at target for many utilities.

Nevertheless, Blumenfeld said along with export demand, the coal market could see some more price volatility in the back half of this year, "which we haven't seen in a long time."

Blumenfeld noted that Cal 19 prices for many of the widely watched global thermal benchmark coals, though backwardated, "are still very attractive for U.S. exports."

For instance, S&P Global Platts on Aug. 7 assessed CIF ARA, for delivered thermal coal into Northern Europe, at $97.80/tonne, while the Cal 19 financial contract was assessed at $87.80/tonne.

Andrew Moore is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.