U.S. thermal coal prices drifted lower during the week that ended Feb. 16 amid forecasts calling for above-normal to much above-normal temperatures to blanket most of the country over the next six to 10 days.
Front-month contracts saw the largest declines, with the 8,800 Btu/lb Powder River Basin product posting the largest drop at 6.4% against a 1% decline for PRB coal to be delivered in 2018.
During 2016, producers aggressively cut coal production in the face of market headwinds, including low natural gas prices and elevated coal stockpiles. Weakness in international coal markets had added to domestic producers' woes as U.S. coal that would otherwise have been shipped overseas was absorbed into the nation's supply.
Over the summer and fall, the natural gas market moved higher as natural gas storage inventories increased at a lower-than-average rate. The market had approached $4/MMBtu, but milder weather has brought the market lower. Through Feb. 16, prompt-month natural gas futures are down 14.2% year-to-date but are up 54.1% year over year to $2.854/MMBtu.
Analysts say stockpiles have been keeping a lid on the domestic thermal coal market, and that as utilities work through them, the domestic thermal market will become more volatile. Through the end of November 2016, power-sector coal stockpiles were 1.9% above the 10-year average at 172.1 million tons, according to the U.S. Energy Information Administration, which estimated days of burn at 14.8% above and 31.2% above the five-year average for bituminous and sub-bituminous coal, respectively.
Meanwhile, prompt-month API2 swap futures are down 4.7% year-to-date but up 87.8% year over year at $81.60/tonne.
The EIA has cited weak global fundamentals and low international coal prices as limiting U.S. coal exports, as "lower mining costs, cheaper transportation costs and favorable exchange rates continue to provide an advantage to mines in other major coal-exporting countries." In its latest outlook, the government agency dropped its expectations for 2017 U.S. coal exports 6% to 51.1 million tons. That figure is down 13.8% versus 2016, but the government expects 2018 exports to slip 2.8% to 49.7 million tons.
As of Feb. 16, the Australian dollar is 6.0% stronger year-to-date and 7.2% stronger year over year relative to the U.S. dollar, while the Colombian peso is 14.4% stronger relative to the U.S. dollar year over year, according to SNL Energy data. Although the currencies of coal-producing countries have strengthened relative to the U.S. dollar, they remain weak relative to historical levels.
Amid weak U.S. coal exports, EIA estimates show that coal-fired generation fell behind gas-fired generation as the nation's top provider of electricity for the first time annually in 2016, and the EIA expects that trend to continue in 2017. While U.S. generation averages 11.1 million MWh/d, the EIA expects natural gas will provide 32.4% of the nation's electricity in 2017 to coal's share of 31.3%. The government expects power-sector coal consumption will total 691 million tons in 2017 before climbing to 695 million tons in 2018.
Longer-term projections for domestic coal consumption and production are bleak and highlight the natural gas market's and government policy's influence in both the short run and long run.
But so far, government estimates show coal production has increased year over year, with the EIA estimating coal production for the week that ended Feb. 11 at 16.5 million tons. While that figure is down 3.1% versus the prior week, it is 21.9% higher than that of the comparable week in 2016, bringing year-to-date production 16.3% higher year over year to 95.9 million tons.
SNL Energy is an offering of S&P Global Market Intelligence. Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages.