As I have stated a number of times before, weather has an outsized effect on the fortunes afforded to coal mining companies. Reading months and months worth of articles proclaiming the death of coal at the hands of natural gas, I think this fact is lost on the masses. It seems the media forgots we went through one of warmest winters in recent history. The warm winter winter pushed back electricity demand, noting that the EIA shows heating degree days (a measurement reflecting
the demand to heat homes and buildings) fell by more than 15% in during
2011/2012 winter season, which in turned forced an inventory glut in both natural gas and coal. To see the effects that weather has on coal demand, I offer the following chart of the annual changes in average degree days (heating and cooling) and coal consumption.
The relationship is, of course, not one-for-one, as other factors also drive coal consumption, but the similar trends are apparent.
So why do I mention this now? I was reading a number of items over the weekend that suggests the weather conditions, at least in the perspective of coal companies, is set to improve. For one, the Barron's article titled Let It Snow, Let It Snow cited the Weather trends International CEO Bill Kirk, whom stated that 90% of the time warm winters with little snow fall are followed by winters that last longer and have more snow. I will have to imply that this also means cooler temperatures. Although this implication may seem weak, this my claim is supported by other forecasts. For instance, the EIA's 2012/2013 winter forecast for heating degree days shows a rise of more than 13% versus last year. I would also note that the Old Farmer's Almanac, who purport to have an accuracy rate of about 80% on their long range weather forecasts, are predicting a colder-than-normal winter for much of the Eastern U.S. and normal winter weather for much of the remainder of the country. Colder-than-normal winter weather will act to alleviate the high coal inventory levels, as electricity demand increases. In addition, this scenario would likely drive up the price of natural gas, as current inventories levels approach the five-year average. An increase in the price of natural gas would likely result in utilities switching back to coal in their energy mix, as burning natural gas starts to become uneconomic for most utilities at levels above $2.50 to $3.00 per MBtu.
As I have stated previously, I believe that traders and investors are beginning to discount a bottom in thermal coal fundamentals. (Please see my previous post on CNX, CLD, and thermal coal here) I think this is evident when you look at the industry as a whole. Just look at the chart for the Market Vectors Trust Coal ETF (ticker KOL).
KOL shares are now trading above the 50-day moving average, having traded above the resistance level on September 13 on some volume conviction. This is in conjunction with an improvement in the MACD (which is about to go positive, showing the building upside momentum) and a rising RSI. This is while my long-term technical indicator is emerging from lower levels (generally a good time to commit long-term funds to an investment).....
..... while short-interest is at all time highs.
Although we may see a consolidation, I would jump at the chance to take advantage of lower prices to add to positions. (Disclosure- I am long Arch Coal and Alpha Natural Resources)
The relationship is, of course, not one-for-one, as other factors also drive coal consumption, but the similar trends are apparent.
So why do I mention this now? I was reading a number of items over the weekend that suggests the weather conditions, at least in the perspective of coal companies, is set to improve. For one, the Barron's article titled Let It Snow, Let It Snow cited the Weather trends International CEO Bill Kirk, whom stated that 90% of the time warm winters with little snow fall are followed by winters that last longer and have more snow. I will have to imply that this also means cooler temperatures. Although this implication may seem weak, this my claim is supported by other forecasts. For instance, the EIA's 2012/2013 winter forecast for heating degree days shows a rise of more than 13% versus last year. I would also note that the Old Farmer's Almanac, who purport to have an accuracy rate of about 80% on their long range weather forecasts, are predicting a colder-than-normal winter for much of the Eastern U.S. and normal winter weather for much of the remainder of the country. Colder-than-normal winter weather will act to alleviate the high coal inventory levels, as electricity demand increases. In addition, this scenario would likely drive up the price of natural gas, as current inventories levels approach the five-year average. An increase in the price of natural gas would likely result in utilities switching back to coal in their energy mix, as burning natural gas starts to become uneconomic for most utilities at levels above $2.50 to $3.00 per MBtu.
As I have stated previously, I believe that traders and investors are beginning to discount a bottom in thermal coal fundamentals. (Please see my previous post on CNX, CLD, and thermal coal here) I think this is evident when you look at the industry as a whole. Just look at the chart for the Market Vectors Trust Coal ETF (ticker KOL).
..... while short-interest is at all time highs.
Although we may see a consolidation, I would jump at the chance to take advantage of lower prices to add to positions. (Disclosure- I am long Arch Coal and Alpha Natural Resources)
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