What happened
Shares of Peabody Energy (BTU -0.41%) skyrocketed on Tuesday and closed the trading day up a solid 13.4%. After today's surge, in fact, Peabody's stock price hit highs not seen since 2019.
Peabody shares have risen dramatically in recent weeks on geopolitical concerns, and the tide continues to turn in the company's favor.
So what
On April 12, European coal prices surged to highs not seen in more than a month as the market tried to assess the impact of the latest sanctions on Russia on the global coal market.
Last Friday, the European Union officially announced its decision to ban coal imports from Russia from August onward, meaning existing contracts between the two nations will be terminated in August. The same day, Japan also joined the club, and said it will phase out coal imports from Russia. Just days ago, the U.K. announced plans to ban Russian coal imports by the end of 2022.
This collective ban comes at a time when coal is already in short supply, thanks to the surge in demand after oil and gas prices rocketed in recent weeks and became so expensive that it compelled several nations to look at other fuel sources like coal to generate electricity.
Image source: Peabody Energy.
In fact, natural gas prices hit 13-year highs last week, and oil prices rebounded sharply on April 12 on speculation of higher demand from China and OPEC's warning. On Monday, OPEC reportedly warned the European Union that further sanctions on Russia could roil oil supply and lead to a global supply shock, according to Reuters.
The U.S. Energy Information Administration's (EIA) latest short-term energy report released on April 12 further estimates demand for coal will rise in 2022. The EIA expects demand to decline from 2023, but only if natural gas prices cool off by then as speculated.
Long story short, demand for coal is rising while supply is short and expected to fall further as sanctions against Russia mount. That's the perfect recipe for higher coal prices, and the perfect growth catalyst for the world's largest private coal producer, Peabody Energy.
Now what
The excitement in Peabody stock based on sanctions on Russia isn't unwarranted. Russia, after all, is one of the world's largest exporters of coal, and exported more than 50% of the coal it produced in 2021 according to the EIA.
More importantly, the bulk of Russia's coal exports are of thermal coal that's used in power plants. As Russian exports dry up amid sanctions, U.S.-based thermal coal miners like Peabody will likely try to boost production capacity aggressively to take advantage of the situation.
For investors in Peabody, the timing couldn't have been any better. Coal was thought to be all but dead, and until last year, Peabody Energy was even facing the threat of bankruptcy. With the coal giant also expected to announce its first-quarter numbers later this month, investor interest in Peabody stock is heating up even more.
