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OTC market: Coal prices bounce higher on expectations of continued stockpile normalization

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OTC market: Coal prices bounce higher on expectations of continued stockpile normalization

Coal prices bounced higher the week ended July 14, as analysts seehigher natural gas prices coupled with current coal production levels asameliorating elevated coal stockpiles that have loomed over the market.

In a July 12 research report, FBR & Co. analyst Lucas Pipeswrote that even though coal production seems to be ramping upward, highernatural gas prices could bring coal stockpiles lower.

"We estimate that even at the recently improved productionrates, domestic coal inventories would decline as long as natural gas pricesstay above $2.50/MMBtu," Pipes wrote, adding that given current productionrates and the current natural gas forward price strip, coal inventories couldreach normal levels by the summer of 2017.

Coal prices saw the sharpest gains along the front part of thecurve. For delivery next month, the 12,500 Btu/lb, less-than-1% sulfur productand the 8,800 Btu/lb Powder River Basin product jumped 4% and 5.7%,respectively, while for delivery in 2017, the prices for those products rose2.2% and 1.5%, respectively.

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During the year, producers have been more in coal in the face of marketheadwinds, including low natural gas prices and elevated coal stockpiles.Weakness in international coal markets has added to domestic producers' woes asU.S. coal that would otherwise be shipped overseas is absorbed into the nation'ssupply. As the U.S. dollar has strengthened relative to the currency of othercoal-producing nations, it has cushioned the impact of falling internationalcoal prices on producers that operate outside the U.S.

Lately, however, the natural gas market has shown strength asnatural gas storage inventories have been climbing at a rate. Through July14, prompt-month natural gas futures are up 16.8% year-to-date but down 4.4%year over year to $2.727/MMBtu.

Still, the market must chip away at elevated coal stockpiles inorder for coal prices to recover. Through the end of April, power-sector coalstockpiles were 19.0% above the 10-year average at 196.2 million tons,according to the U.S. Energy Information Administration, which estimated daysof burn at 24.7% above and 34.4% above the five-year average for bituminous andsubbituminous coal, respectively.

Meanwhile, international coal prices are falling in line withyear-ago levels. Prompt-month API2 swap futures are up 21.7% year-to-date butdown 0.4% year over year at $58.10/tonne.

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The EIA has cited weak global fundamentals and low internationalcoal prices as limiting U.S. coal exports, as "lower mining costs, cheapertransportation costs and favorable exchange rates continue to provide anadvantage to mines in other major coal-exporting countries." In itslatest outlook, the governmentagency lowered its expectations for 2016 U.S. coal exports 10.9% to 59 milliontons. That figure is down 20.2% versus 2015, and the government expects 2017exports to slide another 6.9% to 54.9 million tons.

As of July 14, the Australian dollar is 4.8% stronger year-to-dateand 2.7% stronger year over year relative to the U.S. dollar, while theColombian peso is 7.7% weaker relative to the U.S. dollar year over year,according to SNL Energy data.

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Amid a weak U.S. coal export outlook, the EIA expects thatcoal-fired generation will fall behind gas-fired generation as the nation's topprovider of electricity for the first time annually in 2016. Amid strongernatural gas prices, the U.S. government raised its short-term outlook forpower-sector coal demand to 674 million tons in 2016, up 0.9% versus theprior outlook.

Longer-term projections have U.S. coal consumption and productionsliding furtherwhether or not carbon emissions limits are enacted.

Coal producers are struggling to balance running their operationsefficiently against maintaining market share, and higher-cost production hasfallen off. The government expects the largest coal production decline, on botha percentage and tonnage basis, since record keeping began in 1949, with thelargest percentage declines coming out of the western U.S. and Appalachia.

EIA coal production estimates show that all coal-producing regionsare being hit by the weak market. During the week ended July 9, domestic coalproduction totaled 12.9 million tons, down 22.9% versus the year-ago week, withthe Appalachian region seeing a 24.6% decline. Year-to-date through July 9,total domestic coal production is down 27.6% to 343.4 million tons.

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SNL Energy is an offering of S&P Global Market Intelligence.Market prices and included industry data are current as of the time ofpublication and are subject to change. For more detailed market data,including powernaturalgas and coal indexprices, as well as forwards and futures,visit our Commodities Pages. For weekly U.S. coal production data, visit our regional coalproduction data page. For foreign currency exchange rates, visitour currencyexchange rates data page.