Will Trump Bring Better Days for Coal?

One of Donald Trump’s clearest campaign promises was to revive the beleaguered U.S. coal industry and bring back the thousands of mining jobs that have been lost in recent years. Trump pinned the blame for coal’s woes on the Obama administration’s pending climate change regulations, which would discourage burning coal to generate electricity. Trump isn’t in office yet, and his environmental policies are still taking shape. But the coal industry is already enjoying a bit of a comeback.

Natural Gas: Fueling a Coal Comeback

“Coal hit bottom in the spring of this year,” says Andrew Moore, managing editor of Platts Coal Trader at S&P Global Platts. Back then, coal consumption had plummeted and coal’s share of U.S. electricity generation had fallen to its lowest point on record. (It was around that time that we first spoke with Moore, who predicted that 2016 could mark the low point for the coal business.)

Since then, usage has increased and coal prices are up by 40% or more, depending on the variety. Some big mining companies have emerged from bankruptcy. But it isn’t political change that has improved the industry’s fortunes so much as economic changes; namely, the increase in natural gas prices.

What’s the connection? Coal and gas are the top two fuels for generating power in the U.S., so they compete for market share in the utility industry. Gas prices hit a 17-year low this winter because of warm weather and a glut of supply, making gas more attractive for generating power than coal. Utilities that own both coal and gas-fired power plants idled the former and ran the latter harder to save on fuel costs.

Since spring, gas prices have almost doubled thanks to increased consumption by electric utilities and a small decline in gas production. Today’s gas future’s price of about $3.50 per million British thermal units makes coal mined in Wyoming’s low-cost Powder River Basin especially competitive. That’s good for companies such as Peabody Energy and Cloud Peak Energy, which have significant operations there.

But what about the future? Is coal going to come roaring back under President Trump? Our short answer: Not quite.

Here’s the longer answer. Coal’s upside is probably fairly limited. Sure, there are things Trump could do to help the industry. Platts’ Moore notes that the Trump administration could approve more natural gas export terminals that several energy firms have requested permission to build. Those terminals would ship more of coal’s chief competition overseas instead of keeping it in the U.S. market. Likewise, Trump could undo the ban the Obama administration has placed on granting new coal mining leases on federal lands, or OK more coal export terminals on the West Coast, allowing miners to tap new markets abroad. Plus Obama’s climate regulations, already facing a court challenge, are likely to be significantly curbed.

But in the long run, the competition with natural gas will rule coal’s fate. Though gas prices have rebounded from their winter low, they remain cheap by historic standards. Energy firms operating in U.S. shale fields such as the Marcellus in Pennsylvania have demonstrated that they can quickly increase gas drilling and production when prices rise. Indeed, the latest rig count reports from oilfield services provider Baker Hughes show that gas drilling activity is already picking up (though not as sharply as oil drilling is).

The bottom line: Coal isn’t going away as an energy source. But its days as the dominant source of electric generation are probably over. Older, inefficient coal-fired power plants continue to close, and there’s no sign that utilities intend to replace them with new plants anytime soon. The Department of Energy reports that coal-fired power plant capacity has fallen by 15% since 2011, with natural gas and renewables taking up the slack.

Going forward, expect coal to account for roughly 30% of power generation (versus 50% or more in the early years of the 21st Century), which is in line with its current share. Holding steady might not sound like something to celebrate. But considering earlier expectations that tough climate change regulations and rock bottom natural gas prices would cause coal usage to keep dropping, coal producers and their workers will probably be breathing a sigh of relief.

OPEC Finally Acts (or did it?)

Oil markets were jolted this week by something they hadn’t seen in years: Concerted action by the Organization of the Petroleum Exporting Countries to tighten crude oil supply in the face of excess production. Since late 2014, OPEC has been debating some sort of output cut. But internal dissent and competition from prolific shale oil wells in the U.S. has made reaching an agreement difficult. That’s why I was skeptical that OPEC would do much when it met in Vienna this week.

At first glance, OPEC’s sudden resolve to reduce oil production sounds impressive. Effective Jan. 1, the cartel intends to lower output by 1.2 million barrels per day for six months, with the option to continue the reduction for another six months. That’s a significant chunk of OPEC’s current production of more than 33 million barrels per day. Russia, the world’s largest oil producer but not an OPEC member, is supposedly on board with cutting production in harmony with OPEC.

Oil prices soared on the news, with benchmark West Texas Intermediate crude jumping from about $45 per barrel before the meeting to $51 per barrel by the end of the trading week. But I think the market’s exuberance is a bit overdone.

First, how much production is OPEC really cutting? The announcement of the deal also included news that Indonesia has been suspended from OPEC. Are the roughly 700,000 barrels of oil it pumps each day being counted toward the overall reduction target, since they won’t officially be “OPEC barrels” anymore? Early reports indicated that the remaining OPEC members were effectively divvying up Indonesia’s production amongst themselves in counting toward their reduction quotas, but that isn’t yet clear. What is clear is that the details of how OPEC implements the deal will determine how effective it is.

What’s more, the remaining OPEC members aren’t sharing the burden of production cuts evenly. Libya and Nigeria have been exempted from the deal because both countries have suffered output losses recently due to civil war or terrorism. With those disruptions dying down now, both Libya and Nigeria could soon be increasing production again, forcing the rest of the cartel to cut more to compensate. And what about those accompanying cuts by Russia and other nonmembers? OPEC’s announcement pegs them at 600,000 barrels per day. But Russian Energy Minister Alexander Novak is saying Russia will reduce output by 300,000 barrels, leaving other countries to fill in the rest.

What does all this mean for oil prices? In the near term, lots of volatility. After the OPEC news broke on Wednesday and oil prices leapt higher, I called energy markets analyst Stephen Schork for his quick take and to ask if he’s buying this sudden rally. “I’m sure not shorting it right now,” he said with a laugh. In the short term, he thinks WTI could reach $53 per barrel on OPEC-related optimism. But he also notes that U.S. energy firms will seize on these prices to ramp up drilling and production.

In the longer term, be skeptical that OPEC’s actions will really change the trajectory of prices. Even if its members adhere to the full 1.2 million barrel cut and there’s no monkey business with the math, it will be hard for the cartel to push prices up much with more U.S. output returning to the market. I still see WTI averaging somewhere in the low-$50s per barrel next year, which would be a moderate uptick from now. Maybe OPEC could have engineered a bigger gain in the past, when it wielded greater clout and didn’t have to worry about U.S. shale producers eating into its market share. But those days are long gone.