Tuesday, June 15, 2010

With Gas Price Up, Coal More Attractive

While I am pleased to see the recent increase in natural gas - today's close of the Henry Hub spot price is 32% higher than the price six weeks ago on the first trading day of May - any price increase at this still sensitive time in our economic recovery plants the seeds for another retreat. 

What I'm talking about is coal.  Over the past couple of years, increased use of natural gas in power generation has provided some downside support for gas prices as utilities switched some of their generation from coal to gas.  With gas prices now above the $5/MMBtu threshold, coal is looking more attractive.  A Business Week article quotes a Wall Street analysts saying that the equivalent coal price per MMBtu is $4.63 and that approximately 10% of U.S. power plants, mostly in the southeast, can switch between coal and gas. 

The implication is that gas prices might be capped in this range until the fundamentals of the economy strengthen considerably.  While this one input will not drive gas prices on its own, it is something to keep in mind when watching the trajectory of gas prices. 

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