US Coal - brutal fallout from low natural gas prices

I've recently posted on the drop in natural gas and oil prices, but I haven't commented much on the knock on effects.  A brutal example is the destruction of coal companies in the US.  Train car loadings of coal have completely fallen off a cliff, caught fire, and remain a smouldering ruin.

Look at some of the stock symbols for coal companies and you'll see declines even more severe. Here's BTU (Peabody Energy)

Low natural gas prices are encouraging a switch from coal to natural gas electricity generation

source: http://www.eia.gov/electricity/monthly/update/resource_use.cfm#tabs_con-3

It is not a good time to be in the coal business

disclosure: No positions, either long or short.

Weather and Energy - Hurricane free for another year

The continental US made it another year without a hurricane making landfall. (Winter snow storms are another matter!)

How many more years will the US extend this streak before we get slammed by another one? I have no idea, but it will eventually happen.

A lack of past volatility can lull people into a false sense of security and that's when one can lose quite a bit of money (and lives as well as property in this case)

Some are even opining (Washington Post, 2014 October 7) the recent lack of hurricanes creates a dangerous future situation, and there's some credence to that.

The catastrophic bond market is something I've examined over the years as an alternative asset class but haven't invested any capital in this area yet. We've been in a relatively benign environment and pricing for risk has dropped in this area (sound familiar?)  I'd rather wait for a some 'volatility' to re-enter the system before dipping my toe into this area.

http://www.preferredconcepts.com/when-worlds-collide/ examines this a little more

We've been recently lucky with hurricanes. This will eventually end.

Natural gas has a very big hole to fill this summer

The Polar Vortex winter dramatically drew down natural gas stocks as the numerous cold fronts worked their way through America.  While a decline is natural gas inventories is expected each year, this year America ended the winter with dramatically less natural gas in inventory.

US Natural Gas inventories - via the US EIA http://ir.eia.gov/ngs/ngs.html

As of the most recent report, inventories are 40.1% below their 5 year average. To graphically show what this means going forward, here's an estimation of how much needs to be injected into storage every day until the maximum fill date date of November 11th.

The 2014 line is the one much higher than the rest.  Note how the 2012 line was the lowest, when we experienced extremely low prices.

While it's always a guess as to when we'll hit the maximum in storage each year, (going back 19 years the average date was November 11th with a standard deviation of 9.5 days)  it is quite apparent this year is unlike many others in recent history.  Injecting ~40% more each day looks like a challenge which will not be overcome.  Injection rates depend upon the increased production, weather, industrial activity, hurricanes, and I'm sure a few other factors I have forgotten.

 IF we get a nasty hurricane barreling through the gulf, a hot summer, or an early cold winter we could have some serious inventory problems in early 2015.

I am not attempting to estimate how much natural gas will be in the ground for this coming winter but it is something to watch this summer. 

Video from Russian Forum -- Various hedge fund managers discuss the world

A video from the recent Russian Forum.  It's an hour+ but I suggest you watch it all.

http://2010.therussiaforum.com/news/session-video3/

Numerous topics are covered including, coal, energy, Russia, China, US Treasuries, Emerging versus Developed economies.  Includes Hugh Hendry, one of my favorite money managers.

ht Zerohedge

Fuel Substitution between energy types

I was reading this article from Sober Look blog a few weeks ago and thought I'd investigate further into the ability to switch fuels from coal, natural gas and oil for electricity generation.  To quote:

Fuel switching is actually quite common at power plants, the biggest users of natural gas. Many modern power plants can switch between gas and fuel oil, and many can switch to coal as well.

In fact cheap natural gas has created an oversupply of coal as well.

EIA: A generating unit capable of burning more than one fossil fuel is referred to as a dual-fired unit. Some dual-fired units can only burn one fuel at a time (that is, the fuels are fired sequentially), while others can burn more than one fuel simultaneously (concurrent firing of different fuels). A sequentially fired unit generally uses one fossil fuel as its primary energy source, but can switch to a second fossil fuel as an alternate energy source.

I perused the Energy Information Adminstrations web site and found some confirmational data. 

Here's the year to date (through July 2009) energy production from various sources

Coal  -13.1%
Natural Gas +1.7%
Petroleum Liquids -8.6%

It is apparent natural gas production has been favored in the US over coal and petroleum based products this year due to the low price of natural gas. Considering the continued drop of natural gas prices I would conclude the share of production from natural gas will increase for the year.
 

Additional data can be found at the EIA website showing total electricity production as well as products consumed.

Electricity production from coal is down and as you can see from the chart, coal inventories are up. (EIA source)

I understood the possibility of fuel switching from a petroleum based product to natural gas, but had always assumed natural gas has always been cheaper to run than petroleum.  So why run petroleum at all?  I'm concluding the petroleum only power plants are older, more expensive and only run when electricity demands outstrips supply from cheaper sources such as coal, natural gas, nuclear, etc.

This is where the mindset of contstant growth can trip you up.  Total electricity production in the US is down so far for 2009.  In that situation, the first power plants to be shut down would be the most expensive, the oil based power systems.   

When electricity demand returns and the less expensive natural gas and coal based power generators are running at full capacity, only then will more expensive additional oil generators will be turned on. 

Sources:
http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html

http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html