One last coal post, I promise

Now, I would be the first to admit that the coal industry's fundamentals have not flashed the all-clear signal just yet. That said, I also think a myriad of indicators are showing that industry dynamics are at or nearing a bottom. If this turns out to be the case, I believe we may see one hellashish rally in industry shares. As evidence, I present the following chart showing the weighted price of a sample of the largest companies in the coal mining industry superimposed against the percentage of shares sold short, both  on a market-cap weight basis.

The above chart clearly shows the Street's bet against the industry, as short-interest is at an all-time high. One of the largest knocks against the coal industry is that natural gas, provided the robust growth in shale gas drilling, will remain well supplied and continue to eat into coal's market share for energy production. Those advocating that thesis seem to forgot that shale gas well production schedules are vastly different versus to traditional wells. In fact, this view is starting to grow more mainstream. For instance, the Wall Street Journal ran a piece last Friday called "The Shale Revolution: What Could Go Wrong?". You may be able to find the full article on line (I am sure protected behind a pay wall), but I found the following quote from article and John Hofmeister, the former US operations chief at Shell Corp, most enlightening.

There's still disagreement over the factors governing the growth of production from the new fields. Among those factors: the direction of global supply and demand, how price will help or hinder exploration, whether new regulation will impede development, and how long it will take to build the infrastructure needed to get more oil to market.

Mr. Hofmeister said he believes forecasts also understate the "decline" rate of shale fields. The hydrocarbons tend to flow robustly in the first months of drilling, then decline before plateauing at lower levels.

To sustain growth, companies will need to drill many wells at a rate 'beyond the capacity of the industry as currently defined,' he says. 'Those who ballyhoo oil shale and say that this will take care of us—no, it won't.'"