Titan06's  Instablog

This is a update to my previous article regarding coal rail loadings rapidly increasing to normal seasonal levels. Well as of today coal rail loadings are now high than last year for this time period.

coal demand is back......and supply was cut drastically. i wonder what happens next? hmmm

Below I have graphed the week/week year prior change in rail car coal loadings for all major U.S rail lines going back to December 2011. This information is available on the Association of American Railroads website (www.aar.org/AAR/NewsAndEvents/Freight-Ra...)

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Disclosure: I am long ANR, BTU.

For months now many people have been running around screaming that coal is dead and natural gas has permanently taken a large chunk of its electricity market share. I will admit these claims are true that coal and gas generation were roughly equal for the early spring months of 2012. This was largely due to an extraordinarily warm winter that sent natural gas prices plunging to record lows and left coal utilities with record coal inventories.

Now we are entering a new stage where natural gas surplus is rapidly being eroded away by record low weekly gas injections into storage and we have started the summer off with a record setting heat wave and plenty of more heat on tap for the coming weeks ahead. Most have been focusing their time studying the supply and demand metrics of the natural gas market. This is incredibly hard to do, due to a large amount of industry variables. One can draw a much clearer conclusion as far as what is going on with coal to gas switching by looking at the weekly coal rail car loadings.

Below I have graphed the week/week year prior change in rail car coal loadings for all major U.S rail lines going back to december 2011. This information is available on the Association of American Railroads website (www.aar.org/AAR/NewsAndEvents/Freight-Ra...)

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Some quick and clear conclusions can be made from this data.

• Coal to gas switching was temporary and opportunistic.
• Coal demand has rapidly increased since April. With rail car loadings now approaching historically normal levels.

This has major implications for stocks such as (CLD), (WLT), (ANR), (BTU) and other coal producers and also rail lines such as (CSX).

These companies will be reporting Q2 results this month and early next month. Expect to hear good news as far as coal demand returning to normal levels.

One side note: Coal exports have rapidly increased this year as well. This may be playing into the upward slope of the graph shown above. Overall however, the above chart is extremely bullish for coal producers and rail lines....

Disclosure: I am long ANR, BTU.

There has been a great debate going on recently about what will happen with natural gas in storage way above historical averages. Well i think contributors like Mark Anthony (seekingalpha.com/article/496181-the-reba...) hit the nail on the head when he stated that this natural gas "glut" we currently have is the direct product of the 4th warmest winter for the U.S.A in the last 100 years. So of coarse less gas was burned along with coal. These two fuels make up 75% of the U.S power generation. This glut was not brought on by the "Fracking revolution" , this process has been around and in use for a long time. What we are seeing now is a rebalancing of natural gas production along with coal. One only needs to look back at the historical charts and wonder , ok when was the last abnormally warm winter? And what was the impact to natural gas to try to figure out the correlation between prices and rig count. This should be our guide to what is to come in the next 18 months.

Winter 2002 (January-March) - this was a very warm winter and it came late: anyone can pull the data from NOAA to confirm this. As shown in the figure below gas in storage at the end of this winter (beginning of the injection season) was some 50% above historical normal levels. Seems very much like the same situation we are in today. What makes it a even better reference scenario is that the prior winter was brutally cold, gas in storage plummeted the year prior and prices went to $10/MMBtu. Gas rig count early 2001 was very high at ~1100 it plummeted to ~600 in early 2002 because the price of gas had imploded below the threshold of profitable extraction. Thus setting the stage for the exact same scenario we are in today.

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By reviewing what happened in 2001-2002 for natural gas rig count, price and volume in storage it does not take much to see we are in the same situation today. Some SA contributors like Paulo Santos think gas prices will go much lower and stay low..I say look at the past to see the future.

March 2002 was the bottom for natural gas prices and I'm sure everyone was worrying at that time what if natural gas storage capacity runs out before November......it never happened, in fact it was lower than the prior year. Natural gas prices rose for the remainder of that year.

So i leave you with this : sometimes to see where we are going you need to review where we have been.

Disclosure: I am long ANR, BTU.