It’s old news by now that the exceptionally cold winter put a damper on revenues across a number of industries, but it also increased demand for natural gas, leaving US reserves at the lowest point in a decade, far below the seasonal average. As utilities replenish their reserves ahead of next winter, supplies will be tight and demand for thermal coal should get a boost.

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Natural Gas storage less than half the five year average

The demand for heating over the winter drew down natural gas storage to 981 billion cubic feet (Bcf) last week, less than half the five-year average and 790 Bcf below the seasonal average. A combination of increased gas exports to northern Mexico, below average hydroelectric power in California over the summer, and production bottlenecks in Appalachia all complicate utilities ability to replenish their stores, which should increase price volatility.

As coal is used in place of natural gas, consumption could increase by 30 – 35 million tons (MT), a jump that supply won’t be able to keep up with this year. Even though between 10 – 15 GW worth of coal-fired capacity is being retired in compliance with Mercury & Air Toxic Standards (MATS) implementation, more efficient plants lower down the cost curve will see more use as they become more competitive relative to natural gas.

“Our current view suggests [thermal coal] inventory pressure in 2014-15, aided by colder than normal weather, higher natural gas prices, and lagging supply,” write Sterne Agee analysts Michael Dudas and Satyadeep Jain in a May 15 report. “We now expect 2014 year-end utility stockpiles at 115 MT (vs. precious expectation of 125 MT).”

This 115 MT coal stockpile would be good for 47 days of coal burn, the lowest year-end level in nearly a decade (for comparison, 2008 levels were good for 56 days of coal burn).

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Consol, Arch recommended for exposure to thermal coal prices

Dudas and Jain recommend CONSOL Energy Inc. (NYSE:CNX) and (Arch Coal Inc (NYSE:ACI) for investors wanting to increase exposure to thermal-oriented companies, but they also mention Peabody Energy Corporation (NYSE:BTU) and Alpha Natural Resources, Inc. (NYSE:ANR) as companies that stand to benefit more generally from the global economic recovery in addition to rising coal prices.

“We expect the group to benefit from potential natural gas pricing improvements and investors positioning for cyclical exposure during 2014,” they write.