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The Weak Tie Between Natural Gas and Oil Prices

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  • David J. Ramberg
  • John E. Parsons

Abstract

Several recent studies establish that crude oil and natural gas prices are cointegrated. Yet at times in the past, and very powerfully in the last two years, many voices have noted that the two price series appear to have “decoupled†. We explore the apparent contradiction between these two views. We find that recognition of the statistical fact of cointegration needs to be tempered with two additional points. First, there is an enormous amount of unexplained volatility in natural gas prices at short horizons. Hence, any simple formulaic relationship between the prices will leave a large portion of the natural gas price unexplained. Second, the cointegrating relationship does not appear to be stable through time. The prices may be tied, but the relationship can shift dramatically over time. Therefore, although the two price series may be cointegrated, the confidence intervals for both short and long time horizons are large.

Suggested Citation

  • David J. Ramberg & John E. Parsons, 2012. "The Weak Tie Between Natural Gas and Oil Prices," The Energy Journal, , vol. 33(2), pages 13-36, April.
    • Handle: RePEc:sae:enejou:v:33:y:2012:i:2:p:13-36
    DOI: 10.5547/01956574.33.2.2
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    References listed on IDEAS

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    1. David F. Hendry & Katarina Juselius, 2001. "Explaining Cointegration Analysis: Part II," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-120.
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    1. Zhang, Xiaokong & Chai, Jian & Tian, Lingyue & Pan, Yue & Wang, Jiaoyan, 2024. "What drives the high-risk spillover of benchmark oil prices into China's LNG market?," Energy, Elsevier, vol. 306(C).
    2. Ramesh, Shietal & Low, Rand Kwong Yew & Faff, Robert, 2025. "Modelling time-varying volatility spillovers across crises: Evidence from major commodity futures and the US stock market," Energy Economics, Elsevier, vol. 143(C).
    3. Jerzy Rembeza & Dominik Katarzyński, 2025. "Have the Links Between Natural Gas and Coal Prices Changed over Time? Evidence for European and Pacific Markets," Energies, MDPI, vol. 18(9), pages 1-18, April.
    4. Djula Borozan & Burak Pirgaip, 2025. "Does uncertainty in climate policy play a role in shaping renewable energy use? Evidence from the USA," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(1), pages 2259-2284, January.
    5. Muñoz Mendoza, Jorge A. & Veloso Ramos, Carmen L. & Delgado Fuentealba, Carlos L. & Cornejo Saavedra, Edinson E. & Sepúlveda Yelpo, Sandra M., 2024. "Stock, foreign exchange and commodity markets linkages: Implications for risk diversification and portfolio management," Global Finance Journal, Elsevier, vol. 63(C).

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