Gas fundamentals could support coal

Record low storage levels and increased exports may push natural gas prices to levels at which coal could become more competitive, analysts say.

Natural gas storage levels are expected to come in about 20pc below the five-year average when the build season finishes at the end of October, Doyle Trading Consultants (DTC) head of market analytics Andy Blumenfeld told participants at the Coal Market Strategies conference in Santa Ana Pueblo, New Mexico, this week. DTC is an energy research firm that specializes in coal.

Coupled with rising exports and strong power demand, the lower inventories could push gas prices back up to levels at which coal is better able to compete for dispatch.

"We think that number is just north of $3/mmBtu," Blumenfeld said, referring to the natural gas price point that would generally make coal competitive.

The Henry Hub benchmark has now nearly reached that level. Yesterday, Nymex futures for prompt delivery to the Henry Hub inched up by 0.6¢/mmBtu to $2.955/mmBtu.

And if gas prices rise to the $3.50/mmBtu mark, "you are going to see a significant amount of coal burn pick up," Blumenfeld said.

In addition, four liquefied natural gas (LNG) export terminals that are slated to come on line in the second half of 2018 will double the amount of natural gas moving into the export market, Blumenfeld said.

LNG exports should hit 3 Bcf/d this year, up by 58pc from 2017, the US Energy Information Administration (EIA) said in its monthly Short Term Energy Outlook this week. And DTC sees natural gas exports continuing to climb through 2020.

Natural gas supply is increasing. Gross output from the lower 48 US states hit a record high in May at 89.9 Bcf/d, 12pc higher than a year earlier, EIA said. The agency believes that could keep a lid on pricing.

But Blumenfeld said much of the supply growth is in response to expected demand from the planned LNG terminals. That means the supply and demand balance could remain tight, providing support for pricing at least at levels that could make coal more competitive.

Analysts also think natural gas will begin to face challenges from environmentalists, who have in the past focused mainly on opposing coal. That could potentially limit gas demand in the future.

"Natural gas was funding anti-coal work a number of years ago and now that has formed into Beyond Gas," Blumenfeld said, referring to campaigns by environmental group the Sierra Club, "so what comes around goes around."