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OTC market: US thermal coal prices mixed as stockpiles mask market balancing

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Essential Energy Insights - September 17, 2020

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OTC market: US thermal coal prices mixed as stockpiles mask market balancing

Coal prices were mixed the week ended Dec. 8 as elevated stockpiles continued to subdue the influence of international coal prices on the U.S. market.

Market observers say production cuts have brought the thermal market back into balance, but utility stockpiles are still high enough to limit the volatility seen in the global thermal and coking coal markets.

During the week, Powder River Basin coal prices hovered within roughly 2% of their week-ago levels, while rail-delivered Central Appalachian prices showed less movement on the week.

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During the year, producers have 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 be 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. Through Dec. 8, prompt-month natural gas futures are up 58.3% year-to-date and up 83.4% year over year to a 52-week high of $3.695/MMBtu.

Analysts say coal generators must continue to burn through stockpiles for domestic thermal coal prices to increase. Through the end of September, power-sector coal stockpiles were 2.7% above the 10-year average at 158.2 million tons, according to the U.S. Energy Information Administration, which estimated days of burn at 14.1% above and 36.4% above the five-year average for bituminous and sub-bituminous coal, respectively.

Meanwhile, prompt-month API2 swap futures are up 73.1% year-to-date and up 74.4% year over year at $82.65/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 dropped its expectations for 2016 U.S. coal exports 2%, to 56.8 million tons. That figure is down 23.3% versus 2015, but the government expects 2017 exports to climb 3% to 58.5 million tons.

As of Dec. 8, the Australian dollar is 2.5% stronger year-to-date and 2.2% stronger year over year relative to the U.S. dollar, while the Colombian peso is 7.9% 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 a weak U.S. coal export outlook, the EIA expects that coal-fired generation will fall behind gas-fired generation as the nation's top provider of electricity for the first time annually in 2016, a trend the government agency expects will continue in 2017. Amid stronger natural gas prices, the U.S. government raised its short-term outlook for power-sector coal demand to 701 million tons in 2017, up 0.7% versus the prior outlook.

Longer-term projections have U.S. coal consumption and production sliding further whether or not carbon emissions limits are enacted. Amid falling demand and exports, higher-cost production has fallen off. The government expects U.S. coal production to fall to the lowest level since 1978.

EIA coal production estimates show that all coal-producing regions are being hit by the weak market. During the week ended Dec. 3, domestic coal production totaled 16.3 million tons, up 1.1% versus the year-ago week, with the Appalachian region seeing a 2.6% gain. Year-to-date through Dec. 3, total domestic coal production is down 18.3% to 688.7 million tons.

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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.