By Andrew Moore

August 5, 2017 - Coal stockpiles at US utilities continue to trend lower, but it could bode well for coal prices moving into the fall, especially when considered alongside higher natural gas prices and lower coal production. Andrew Moore considers stockpile and production statistics, particularly for subbituminous coal. However, it's a fine balance: if coal prices climb too much, natural gas could stage a comeback.

The US Energy Information Administration released its latest stockpile figures last week, which showed utility inventories stood at 164.9 million st at the end of May, down 14.7% from last year and down 6.7% from the five-year average for the month.

Platts Analytics estimates that coal stockpiles through July have continued to trend lower, ending the month at roughly 131 million st, testing the lows last seen in the fall of 2014.

Let’s take a closer look at stockpiles of subbituminous coal, which is lower-heat coal from Wyoming’s Powder River Basin. It makes up roughly half of the US thermal coal market and stood at 90 million st at the end of May, down 14.7% from last year and down 1.4% from the five-year average for the month. While 1.4% doesn’t sound like much, it’s the first time they’ve dropped below the five-year average since February 2015.

Lower stockpiles often signal higher prices. In the last five years, the over the counter price for PRB 8,800 Btu coal peaked at $13.50/st in late April 2014, in the aftermath of a cold winter highlighted by the polar vortex event. At that point, subbituminous stockpiles were off more than 32% from the five-year average.

This year at the end of May, PRB 8800 coal was assessed at $11/st, but has largely risen in the ensuing weeks, and was assessed at $11.90/st on July 31st.

The drop in stockpiles isn’t being met with production increases, however, as utilities are heard to be delaying procurement until they have a better picture of natural gas prices heading into the fall.

In the second quarter, US coal production dipped 3.5% compared to Q1. Historically second quarter coal production lags Q1 due to utilities taking coal units offline for maintenance in advance of summer demand. But for this July, coal production estimates remain weak, totaling roughly 60 million st, which would be the lowest total of the year.

Coal production is projected to surpass last year’s total, as coal demand is up due to higher natural gas prices.

Those higher natural gas prices have been supported by a decrease in production, particularly in Texas and along the Gulf Coast, as well as a decline in storage injections. But natural gas futures prices continue to show a bearish trend, which could be one reason utilities aren’t in a coal buying mood.

Should stockpiles continue to decline, and gas prices stay above $3/MMBtu, a coal price rally is likely heading into the fall. But if they climb too much, natural gas could find itself the favored fuel.

Until next time on the Snapshot, we’ll keep an eye on the markets.