Coal Surges Past $50 as Crude Prices Sag

Both coal and oil rallied from over 10-year lows in early 2016, but coal, oil have diverged since June.

Coal prices in 2016 have regained their footing above the psychological threshold of $50, leaving the oil industry wondering when crude prices will return to form.

Both thermal coal and crude oil prices plunged to more than 10-year lows earlier this year as both industries grappled with oversupply and slowing demand, but prices recovered as production outages tightened the market.

However, the two have diverged sharply since June.

Starting June 1, benchmark API2 coal futures in Rotterdam have rallied 20 percent to around $60 a tonne, the highest in a year, while Asia benchmark API4 futures have climbed 15.6 percent to $62.60.

Brent crude futures, meanwhile, have slumped 15 percent to back below $45 a barrel.

It is much the same story in physical markets, where major oil producers such as Saudi Arabia continue to offer crude at discounts, while coal miners have raised prices.

Oil is the world's biggest fuel source, pushed mainly by the United States and its transportation needs. But coal generates much of the world's electricity, especially in emerging markets.

The current divergence stems from Asia's continuing dependence on coal. China uses coal to meet 64 percent of its energy needs while India uses the fuel to meet 45 percent of its demand, even while both are expanding oil consumption.

It is these rising orders from India and China, as well as output cuts by miners, that have pushed up coal, while oil prices have come under pressure on the back of plentiful supplies and fears of slowing demand.

Many oil output cuts were unplanned, such as Canada's wildfires or sabotage in Nigeria, and much of that production has returned or is expected back soon.

"Brent oil prices are down $5 per barrel since the start of June with a weakening of oil demand expectations coming alongside a recovery of production in Canada. Oil production in Nigeria has been on the rise too," Barclays bank said in a note to clients this week.

In contrast, coal miners from Indonesia to Colombia have cut output or been driven bankrupt, tightening the market by permanently removing significant supply.

"Supply (cuts) of coal remains the main price supportive factor," said Georgi Slavov of commodity brokerage Marex Spectron.

At the same time, coal imports from major buyer China have rebounded, largely due to domestic production cuts.

By Henning Gloystein