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What drives natural gas prices?

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Author Info
Stephen P. A. Brown
Mine K. Yücel

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Abstract

For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0703.

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Date of creation: 2007
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Handle: RePEc:fip:feddwp:0703

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lance J. Bachmeier & James M. Griffin, 2006. "Testing for Market Integration: Crude Oil, Coal, and Natural Gas," The Energy Journal, International Association for Energy Economics, vol. 27(2), pages 55-72.
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  3. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May. [Downloadable!] (restricted)
  4. Frank Asche & Petter Osmundsen & Maria Sandsmark, 2006. "The UK Market for Natural Gas, Oil and Electricity: Are the Prices Decoupled?," The Energy Journal, International Association for Energy Economics, vol. 27(2), pages 27-40.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emilie Alberola & Benoît Chèze & Julien Chevallier, 2008. "The EU Emissions Trading Scheme : Disentangling the Effects of Industrial Production and CO2 Emissions on Carbon Prices," EconomiX Working Papers 2008-12, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  2. Anne Neumann, 2008. "Linking Natural Gas Markets: Is LNG Doing Its Job?," Discussion Papers of DIW Berlin 822, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  3. Stephen P.A. Brown & Mine K. Yucel, 2008. "Deliverability and regional pricing in U.S. natural gas markets," Working Papers 0802, Federal Reserve Bank of Dallas. [Downloadable!]
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