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OTC market: US thermal coal prices move counter to natural gas market

Coal prices headed mostly higher in the week ended Jan. 19 even as the natural gas market balked amid milder winter weather. As NYMEX-spec prices remained flat, the 12,500 Btu/lb, less-than-1% sulfur and Powder River Basin products saw the entire forward curve shift higher, with gains concentrated at the front part of the curve.

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During 2016, producers aggressively cut coal production in the face of market headwinds, including low natural gas prices and elevated coal stockpiles. Weakness in international coal markets had added to domestic producers' woes as U.S. coal that would otherwise have been shipped overseas was absorbed into the nation's supply.

Over the summer and fall, the natural gas market moved higher as natural gas storage inventories increased at a lower-than-average rate. The market had approached $4/MMBtu, but milder weather has brought the market lower. Through Jan. 19, prompt-month natural gas futures are up 1.2% year-to-date and up 57.5% year over year to $3.368/MMBtu.

Analysts say stockpiles have been keeping a lid on the domestic thermal coal market, and that as utilities work through them, the domestic thermal market will become more volatile. Through the end of October 2016, power-sector coal stockpiles were 0.6% above the 10-year average at 163.5 million tons, according to the U.S. Energy Information Administration, which estimated days of burn at 7.5% above and 37.2% above the five-year average for bituminous and sub-bituminous coal, respectively.

Meanwhile, prompt-month API2 swap futures are up 3.6% year-to-date and up 94.0% year over year at $88.75/tonne.

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The EIA has cited weak global fundamentals and low international coal prices as limiting U.S. coal exports, as "lower mining costs, cheaper transportation costs and favorable exchange rates continue to provide an advantage to mines in other major coal-exporting countries." In its latest outlook, the government agency projected exports will continue lower over the next two years. 2016 exports totaled 56.2 million tons, and the EIA projects that the U.S. will ship 54.4 million tons and 53.8 million tons, respectively, in 2017 and 2018.

As of Jan. 19, the Australian dollar is 4.1% stronger year-to-date and 8.0% stronger year over year relative to the U.S. dollar, while the Colombian peso is 13.3% stronger relative to the U.S. dollar year over year, according to SNL Energy data. Although the currencies of coal-producing countries have strengthened relative to the U.S. dollar, they remain weak relative to historical levels.

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Amid weak U.S. coal exports, EIA estimates show that coal-fired generation fell behind gas-fired generation as the nation's top provider of electricity for the first time annually in 2016, but the prospects of that trend continuing amid stronger gas prices is less clear. The government expects power-sector coal consumption will total 720 million tons in 2017 before backsliding to 710 million tons in 2018.

Longer-term projections for domestic coal consumption and production are bleak and highlight the natural gas market's and government policy's influence in both the short run and long run.

The EIA estimates that U.S. coal production for the week ended Jan. 14 totaled 15.7 million tons, up 13.4% from the comparable week in 2016 to bring year-to-date production 9.2% higher year over year to 29.5 million tons.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages.