Coal finds an open door and moves in as squatter in U.S. generation mix
July 1, 2024
Key Observations:
Strong U.S. demand for power, an active hurricane season’s threat to gas supply reliability, relative energy prices, and a U.S. presidential debate debacle have opened the door for coal to perform.
Prompt NYM natural gas (NG1) briefly surged above $3 per MMBtu in Jan-24 to arb against Central Appalachia spot coal during a polar vortex deep freeze. That uplift quickly receded as the hot winter reasserted itself. Mounting gas inventories then forced NG1 below Northern Appalachia coal prices and its own marginal opex cost to find demand and to fell gas-directed rigs.
Those price-driven fundamental adjustments resolved by late April, when strong demand growth spurred NG1 on another run to arb against CAPP. Between Apr 26 and Jun 14, the weekly average NG1 price advanced from $1.70 to $2.98 (+75%). Moreover, strong underlying demand for feedstock in the power sector continues to lift both ceiling and floor in the channel for Appalachia coal prices.
Price action in U.S. gas and coal basis markets implies cost-driven switching in the power stack that is not yet visible in the monthly data (latest data are Apr-24, labeled (d) in chart at far right). Marginal demand switching increases volatility in gas while leaving the bull case intact for both gas and coal. The first-ever CAT4 Atlantic Hurricane in June also gives coal near-term edge on reliability.
Odds of Mr. Biden’s electability are priced too at this coalbed. Plummeting confidence in him now manifests as surging value for shares in this heavily-shorted sector.
Benefits: Peabody (BTU), CONSOL (CEIX), Arch Resources (ARCH).
Source: EIA, Blacklight Research. Note: spot prices in the chart above are Powder River Basin (Gillette, Wyoming), Illinois Basin, Northern Appalachia (e.g., Pittsburgh), and Central Appalachia (Big Sandy/Ohio Rivers, West Virginia/Kentucky/Ohio). NG1 = NYM Henry Hub natural gas M1 futures.
Comments