Global coal use jumped to a record high this year because of the sharp increase in natural gas prices. This prompted a wave of fuel switching away from NatGas by utilities for power generation, pushing up demand for price-competitive options, including coal, in many countries.
There are emerging signs across the Western world that ‘gas-to-coal switching’ could be reversed, perhaps only temporarily, as warmer weather is expected across Europe and the US.
The latest 2-week outlook for the Lower 48 is above-average temperatures for the first half of January.
Europe is also expected to record warmer temperatures than average for the next two weeks.
As a result, Henry Hub NatGas prices crashed 12% on Wednesday as cold weather cleared out of the US. This means utilities will become more incentivized to burn NatGas (also more ‘green’) for power generation than coal.
Even in Europe, NatGas prices are well below the costs for coal. That wasn’t the case several months ago.
“Cheaper natural gas prices are negative for coal producers, whose product competes against gas for electricity generation,” Bloomberg said.
Houston-based energy firm Criterion Research said coal-to-gas switching would increase if NatGas prices remained under $7 million British thermal units (MMBtu).
As natural gas prices weaken at the onset of 2023, we revisited the last few years of data for the United States thermal stack, which includes coal and gas generation. Throughout 2022, natural gas managed to hold 60-70% of the thermal stack while Henry Hub futures remained above $7.00. However, when prices were in the $5-7 range, natural gas was able to post a few days in the 70-75% range.
With that in mind, if we see prices remain below $5 throughout much of 2023 and natural gas supply within the US continues to hold onto its 100+ Bcf strength, we could continue to see coal burns pushed out of the stack in favor of higher natural gas usage.
Throughout 2022, gas burns managed to account for over 70% of the stack when prices were below $7, but when they moved above $7, it forced gas back below 70%. Overall, the trend is far different than traditional coal-to-gas switching was in 2019 and 2020. #ongt #natgas pic.twitter.com/l3O2r4SnWU
— Criterion Research (@PipelineFlows) December 28, 2022
Energy traders are dumping coal stocks in anticipation of the switching. The Russell 3000 Coal Subsector Index plunged 10% on Wednesday.
Major coal companies were also dumped. Peabody Energy fell 11%, Alpha Metallurgical Resources -8.8%, Ramaco Resources -8.3%, Arch Resources -8%, and Warrior Met Coal -8%.
For now, declining NatGas prices means a reduction in coal burns and a transition back to higher burn rates for NatGas. Falling NatGas prices indicate lower electricity prices across the board, a relief desperately needed for many folks across the West.
Tyler Durden
Thu, 12/29/2022 – 02:45
