Oil exporters’ hopes for a freeze in crude production melted in the Doha sun this past weekend. And for the coal industry, a glimmer of hope amid recent news of sliding demand and bankrupt mining giants.
OPEC Strikes Out
Since reaching a low of about $26 per barrel in February, benchmark West Texas Intermediate (WTI) crude has rallied sharply on hopes that the world’s major exporters would work together to curtail excess production. That optimism sent WTI as high as $42 per barrel last week, shortly before members of the Organization of Petroleum Exporting Countries met with Russia (not a member, but a major oil producer) in the city of Doha on the coast of Qatar. Despite Iran’s refusal to join with its OPEC colleagues in a pact to jointly freeze output at January levels, many of the meeting’s participants sounded a hopeful note that some sort of agreement could be hammered out.
But Saudi Arabia had other ideas. The de facto leader of OPEC announced that it wouldn’t agree to any freeze in production unless every member of the group did so as well. That effectively torpedoed the meeting, since Iran has been adamant that it won’t restrict oil production until its exports rebound after the recent termination of Western oil sanctions. The Saudis clearly did not want to hold back their own production just to let Tehran grab a larger share of the global oil market.
Oil prices promptly dipped on the news, slipping back below $40 per barrel. But OPEC’s failure to strike a deal doesn’t necessarily spell doom for oil producers.
Granted, the oil market is still oversupplied. And while an agreement to put a ceiling on output would have been a first step toward curing that oversupply, there is reason to believe that supply will naturally edge down even without a formal campaign from OPEC.
U.S. crude output has already slipped from its peak of 9.7 million barrels per day in April 2015. A year later, the Department of Energy’s weekly Petroleum Status Report pegs production at about 9 million barrels per day. And with the number of active oil rigs continuing to decline, production figures to drop further. Meanwhile, oil companies around the world have been announcing cuts to their capital budgets, suggesting that fewer new wells will be coming on line in coming months and years.
Eventually, demand will catch up with diminished supply. But it will be a slow process. Oil bulls hoping that OPEC would put a sudden end to the oversupply situation will have to be content with a slow, grinding decline instead. That means crude prices are unlikely to move much higher this spring from their current levels.
Meanwhile, in Coal Country …
Last week brought news of the latest casualty of the swoon in coal demand: Peabody Energy filed for bankruptcy protection. The company cited the “unprecedented industry downturn” for the move.
The U.S. coal industry is indeed facing tough times. The combination of stringent new air quality rules for power plants and rock-bottom natural gas prices has prompted electric utilities to close older, coal-fired power plants and generate more power from natural gas and renewable sources. Last year, the U.S. burned about 800 million tons of coal, the lowest level since the mid-1980s. And 2016 is likely to see further declines.
Overseas trends are also worrisome for coal producers. Last December, the International Energy Agency reported that global coal usage plateaued in 2014 after steadily climbing for years. China, which burns fully half of the world’s coal, is seeing growth in coal demand slow. In fact, the IEA says that a peak in Chinese demand might be near, if the country’s economy slows and if Beijing moves toward less-polluting alternative sources of energy.
But don’t write any obituaries for the U.S. coal sector just yet. Andrew Moore, managing editor of Platts Coal Trader, says that coal’s biggest challenge right now is cheap natural gas. At a bit less than $2 per million British thermal units (MMBtu), gas is very attractive to electric utilities. But as gas prices climb, he expects certain varieties of U.S. coal to become more cost-competitive next year.
Of course, not all coal is created equal. Some types contain more sulfur than others, for instance. And mining costs can vary by region. Moore reckons that coal from Wyoming’s Powder River Basin becomes economical for electric utilities when natural gas prices reach $2.50 per MMBtu. Should gas prices rise to $3.50, coal mined in Illinois can compete with gas. Appalachian coal requires a gas price of about $4.50. So, if and when natural gas prices turn higher, look for Wyoming coal to be the first beneficiary of the trend. That would spell some relief for ailing mining firms such as Peabody and Alpha Natural Resources, which have major operations in the Cowboy State.
In the short term, coal’s outlook is still grim. Reports from freight railroads indicate that coal volumes moving by train are way down (a 35% drop in March 2016 compared with March 2015, for instance). Platts’ Moore figures that total U.S. coal consumption this year will slip to between 650 million and 700 million tons, comparable to levels from the late 1970s.
But 2016 could mark a trough for the industry, with demand making a modest comeback as natural gas prices rise. So, while King Coal won’t be returning to his throne anytime soon, reports of his death may be a bit premature.