What happened

By roughly midday today, shares of global coal miner Peabody Energy (NYSE:BTU) were down about 15%. But that doesn't do any justice at all to the wild price gyrations that the miner has experienced this week. On Monday, the first trading day of the span, the stock rallied over 20%. Then it swiftly turned around and began to fall. The drop was somewhat precipitous on Tuesday, but the declines have continued right through to roughly 2:30 p.m. EDT today. There's a lot to unpack.

So what

On Oct. 18, Peabody reported preliminary results for the third quarter, which won't actually be released until Oct. 28. Investors appear to have liked what they read, since the stock rallied strongly. But the news was actually kind of mixed. For example, management expects to report adjusted EBITDA of between $280 million and $290 million, up from $95.4 million in the year-ago period.

That's great, but it also expects to post a loss of between $40 million and $60 million. Notably, it has benefited from fast-rising coal prices, but its hedging efforts have materially crimped the benefit. That said, investors appeared to be reacting to coal price moves at least as much as they were to Peabody's preliminary results.

Two people in the front seat of a roller coaster.

Image source: Getty Images.

Here's the thing: Even though the company sold more coal in the third quarter than it had in more than a year, it can't avoid the fact that coal is a commodity. And commodities can and do fluctuate wildly based on supply/demand expectations. Which is where the stock declines come in. After hitting multiyear highs last week, coal prices have since plunged by as much as 30%. Given that backdrop, and the fact that investors often view Peabody as a coal proxy, it isn't shocking that the stock has fallen as well.

The key reason for all of this bad news, meanwhile, is that China, one of the largest coal consumers in the world, is taking steps to reduce the price of coal. The country is in the midst of a power crisis, so this is hardly shocking news. But it still doesn't bode well for coal prices if China's miners are given the green light to dig, dig, dig.

Now what

The global energy sector is in a massive state of flux today. Carbon-based fuels, like coal, are seen as dirty and bad for the environment, with broad calls to reduce their use. In their place, countries around the world are looking to build renewable power assets. In the long term, this big-picture trend is not particularly good for coal or the companies that mine for it. However, moving away from carbon fuels has been more difficult and slower than hoped, so there is still a need for them.

The problem for Peabody is that coal is really a low-hanging fruit when it comes to reducing carbon dioxide emissions. It is fairly easy, and relatively inexpensive, to replace a coal-fired electric power plant with a cleaner-burning natural gas plant. It is, in fact, this dynamic that has led to years of falling coal demand. So while coal may have some good periods, most investors will probably want to err on the side of caution and avoid the sector unless they have very strong convictions about the near-term direction of coal prices. That said, the volatility in Peabody's shares over just a couple of days is evidence of how wild a ride it can be to bet on this increasingly out-of-favor fuel.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.