IDEAS home Printed from https://ideas.repec.org/a/aen/journl/ej38-2-oglen.html
   My bibliography  Save this article

Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price

Author

Listed:
  • Frank Asche, Atle Oglend, and Petter Osmundsen

Abstract

When natural gas prices are subject to periodic decoupling from oil prices, for instance due to peak-load pricing, conventional linear models of price dynamics such as the Vector Error Correction Model (VECM) can lead to erroneous inferences about the nature of cointegration relationships, price adjustments and relative values. We propose the use of regime-switching models to address these issues. Our regime switching model uses price data to infer whether pricing is oil-driven (integrated) or gas-specific (decoupled). We find that UK natural gas (NBP) and oil (Brent) are cointegrated for the majority of the sample considered (1997-2014). UK gas prices tend to decouple during fall and early winter, when they increase relative to oil consistent with seasonal demand for natural gas creating gas-specific pricing. When evidence favors integrated markets, we find that the industry 10-1 rule-of-thumb holds (the value of one MMbtu of natural gas in the UK market is one tenth the value of one barrel of Brent oil), while the overall relationship, including decoupling periods, is 9.2-1. The paper highlights that what relative value to use, depends on the purpose of its use.

Suggested Citation

  • Frank Asche, Atle Oglend, and Petter Osmundsen, 2017. "Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
  • Handle: RePEc:aen:journl:ej38-2-oglen
    as

    Download full text from publisher

    File URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=2880
    Download Restriction: Access to full text is restricted to IAEE members and subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 1-23.
    2. repec:dau:papers:123456789/1433 is not listed on IDEAS
    3. Apostolos Serletis & John Herbert, 2007. "The Message in North American Energy Prices," World Scientific Book Chapters,in: Quantitative And Empirical Analysis Of Energy Markets, chapter 13, pages 156-171 World Scientific Publishing Co. Pte. Ltd..
    4. Ravi Bansal & George Tauchen & Hao Zhou, 2004. "Regime Shifts, Risk Premiums in the Term Structure, and the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 396-409, October.
    5. Siliverstovs, Boriss & L'Hegaret, Guillaume & Neumann, Anne & von Hirschhausen, Christian, 2005. "International market integration for natural gas? A cointegration analysis of prices in Europe, North America and Japan," Energy Economics, Elsevier, vol. 27(4), pages 603-615, July.
    6. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
    7. Stephen P. A. Brown & Mine K. Yucel, 2008. "What Drives Natural Gas Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 45-60.
    8. Asche, Frank & Osmundsen, Petter & Tveteras, Ragnar, 2002. "European market integration for gas? Volume flexibility and political risk," Energy Economics, Elsevier, vol. 24(3), pages 249-265, May.
    9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    10. Castle, Jennifer L. & Hendry, David F., 2010. "A low-dimension portmanteau test for non-linearity," Journal of Econometrics, Elsevier, vol. 158(2), pages 231-245, October.
    11. Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
    12. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
    13. Kanamura, Takashi & O[combining macron]hashi, Kazuhiko, 2008. "On transition probabilities of regime switching in electricity prices," Energy Economics, Elsevier, vol. 30(3), pages 1158-1172, May.
    14. Pirrong,Craig, 2012. "Commodity Price Dynamics," Cambridge Books, Cambridge University Press, number 9780521195898, December.
    15. repec:clg:wpaper:1999-04 is not listed on IDEAS
    16. Asche, Frank & Misund, Bård & Sikveland, Marius, 2013. "The relationship between spot and contract gas prices in Europe," Energy Economics, Elsevier, vol. 38(C), pages 212-217.
    17. Frank Asche & Atle Oglend & Petter Osmundsen, 2013. "UK Natural Gas: Gas-Specific or Oil Driven Pricing?," CESifo Working Paper Series 4503, CESifo Group Munich.
    18. Brigida, Matthew, 2014. "The switching relationship between natural gas and crude oil prices," Energy Economics, Elsevier, vol. 43(C), pages 48-55.
    19. 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. 0(Number 2), pages 27-40.
    20. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, December.
    21. Erdős, Péter, 2012. "Have oil and gas prices got separated?," Energy Policy, Elsevier, vol. 49(C), pages 707-718.
    22. Frank Asche & Odd Bjarte Nilsen & Ragnar Tveteras, 2008. "Natural Gas Demand in the European Household Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 27-46.
    23. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162, December.
    24. Panagiotidis, Theodore & Rutledge, Emilie, 2007. "Oil and gas markets in the UK: Evidence from a cointegrating approach," Energy Economics, Elsevier, vol. 29(2), pages 329-347, March.
    25. Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
    26. David J. Ramberg and John E. Parsons, 2012. "The Weak Tie Between Natural Gas and Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    27. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:aen:journl:ej39-1-hartley is not listed on IDEAS
    2. repec:gam:jeners:v:11:y:2018:i:12:p:3486-:d:190416 is not listed on IDEAS
    3. repec:eee:enepol:v:113:y:2018:i:c:p:68-75 is not listed on IDEAS

    More about this item

    JEL classification:

    • F0 - International Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aen:journl:ej38-2-oglen. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Williams). General contact details of provider: http://edirc.repec.org/data/iaeeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.