The Most Unlikely Beneficiary of the Natural Gas Boom

An array of energy's sub-industries are making a fortune from America's natural gas boom.

Rigs, pipelines, rail, wastewater treatment, trucking, seismic imaging, well-site security... And a lot more opportunity is on the way, like the deal Kent just uncovered.

But perhaps the most unlikely beneficiary of the shale revolution is the coal industry.

After all, "King Coal" has been dethroned in recent years by the swelling supply - and bargain prices - of clean-burning natural gas. Indeed, thermal coal at the Australian port of Newcastle, the Asian benchmark price, is currently near lows not seen since November 2009.

Australian producers have especially been struggling. They've been cutting costs and paring back production because U.S. and large project financiers like the World Bank are pulling away from coal projects.

And overall, ever-increasing environmental regulation is discouraging coal-powered electricity.

But the dynamic is suddenly changing.

That's why these $19 coal shares could jump to $26...

How to Play Worldwide Energy Arbitrage

This is a pricing game - a global one.

You see, while North Americans currently enjoy natural gas at close to $3.40 per million cubic feet (Mcf), Europeans are paying three times as much, between $10 and $11 per Mcf.

Asians are bearing more than four times the cost, at $15.60 per Mcf.

That's why Japan and South Korea are ramping up their LNG imports.

And this massive arbitrage opportunity - low North American prices versus high European and Asian prices - is supporting natural gas here in North America.

But it's making cheap coal attractive everywhere...

In Europe:

Cheaper Fuel Trumps Emissions Goals

Coal, according to Frost & Sullivan, has "suddenly become popular once again."

Harald Thaler, industry director at the firm, says the influence of cheaper North American natural gas from shale production has been twofold:

Massive shale gas production has caused North American utilities to switch from coal, while slowing Chinese demand simultaneously weighed on the fuel source.

And that has coal prices looking a lot more attractive to Europeans, despite their goal to reduce carbon emissions to 80% of 1990 levels within seven years.

In America:

Coal Will Generate 40% of U.S. Electricity

With natural gas prices on a steady, albeit slow, upward climb, coal has become more attractive to American utilities, as well.

That's why Moody's recently upped its outlook for the U.S. coal industry, from negative to stable, indicating that despite weak business conditions, they don't see industry fundamentals "deteriorat[ing] further over the next 12 to 18 months."

Vice president and senior analyst at Moody's, Anna Zubets-Anderson, said the agency expects "over the next year or so coal-fired power plants will capture 40% of US electricity generation, up from 37% in 2012."

Zubets-Anderson also foresees stable but rising natural gas prices to make coal more attractive on a relative basis, potentially through early 2015.

In India:

They're Importing 48% More Coal... Just to Keep Up

America, Europe, Japan, and South Korea are supporting natural gas prices, reviving coal demand in the process. But India could seriously tip the scales...

At the end of June, 17 of India's power plants had less than seven days' worth of fuel, according to the Central Electricity Authority.

(Fuel stocks below 15 days are deemed critical.)

That's why India - already the third-largest consumer of coal - is ramping up imports, which jumped a stunning 48% in June, from 10.5 million tonnes last year to 15.53 million tonnes this year, of which 12.73 million tonnes was steam coal - one of the largest amounts on record.

In the second quarter alone, India took in the equivalent of 40% of its 2012 import quantities.

It's true that increasing coal output from both Australia and Indonesia has the market concerned about oversupply. However, that may already be self-correcting, as low prices are causing some production, especially in Australia, to be scaled down or even placed on care and maintenance.

Meanwhile, India's voracious appetite may well be able to absorb the recent oversupply, and then some.

If we were to project last quarter's Indian imports through to year's end, the nation of more than 1 billion would be on track to import almost 145 million tonnes of coal. And that would represent an increase of more than 60% over 2012.

Profiting from a Coal Spike Is Easy

The best way to gain exposure to the potential coal bull is through the Market Vectors Coal ETF (NYSE Arca: KOL). This fund invests in companies that generate at least 50% of their revenues from coal production, mining, mining equipment, transportation, or storage.

Shares trade for about $19 right now. But now that they've jumped the 50-day moving average, $22 looks like the next upside target. And further momentum could take KOL to the $26 level - a 37% gain move.

It could happen quickly, too.

Remember, there's often sizeable opportunity when a sector simply improves from "awful" to "not so bad." And that looks like what's happening in the coal sector right now.