IDEAS home Printed from https://ideas.repec.org/a/sae/enejou/v38y2017i2p201-228.html
   My bibliography  Save this article

Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices

Author

Listed:
  • Derek Bunn
  • Julien Chevallier
  • Yannick Le Pen
  • Benoit Sevi

Abstract

As speculative flows into commodity futures are expected to link commodity prices more strongly to equity indices, we investigate whether this process also creates increased correlations amongst the commodities themselves. Considering U.S. oil and gas futures, we investigate whether common factors, derived from a large international data set of real and nominal macroeconomic variables by means of the large approximate factor models methodology, are able to explain both returns and whether, beyond these fundamental common factors, the residuals remain correlated. We further investigate a possible explanation for this residual correlation by using some proxies for trading intensity derived from CFTC publicly available data, showing most notably that the proxy for speculation in the oil market increases the oil-gas correlation. We thus identify the central role of financial activities in shaping the link between oil and gas returns.

Suggested Citation

  • Derek Bunn & Julien Chevallier & Yannick Le Pen & Benoit Sevi, 2017. "Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices," The Energy Journal, , vol. 38(2), pages 201-228, March.
    • Handle: RePEc:sae:enejou:v:38:y:2017:i:2:p:201-228
    DOI: 10.5547/01956574.38.2.dbun
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.5547/01956574.38.2.dbun
    Download Restriction: no
    File URL: https://libkey.io/10.5547/01956574.38.2.dbun?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ron Alquist & Olivier Gervais, 2013. "The Role of Financial Speculation in Driving the Price of Crude Oil," The Energy Journal, , vol. 34(3), pages 35-54, July.
    2. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    3. Peter R. Hartley & Kenneth B. Medlock III, 2014. "The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate," The Energy Journal, , vol. 35(2), pages 25-44, April.
    4. Boivin, Jean & Ng, Serena, 2006. "Are more data always better for factor analysis?," Journal of Econometrics, Elsevier, vol. 132(1), pages 169-194, May.
    5. 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).
    6. Adams, Zeno & Glück, Thorsten, 2015. "Financialization in commodity markets: A passing trend or the new normal?," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 93-111.
    7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    8. Manera, Matteo & Nicolini, Marcella & Vignati, Ilaria, 2016. "Modelling futures price volatility in energy markets: Is there a role for financial speculation?," Energy Economics, Elsevier, vol. 53(C), pages 220-229.
    9. 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.
    10. Mu, Xiaoyi, 2007. "Weather, storage, and natural gas price dynamics: Fundamentals and volatility," Energy Economics, Elsevier, vol. 29(1), pages 46-63, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Derek Bunn, Julien Chevallier, Yannick Le Pen, and Benoit Sevi, 2017. "Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    2. Guo, Jiaqi & Long, Shaobo & Luo, Weijie, 2022. "Nonlinear effects of climate policy uncertainty and financial speculation on the global prices of oil and gas," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Wiggins, Seth & Etienne, Xiaoli L., 2017. "Turbulent times: Uncovering the origins of US natural gas price fluctuations since deregulation," Energy Economics, Elsevier, vol. 64(C), pages 196-205.
    4. Abdullahi Alim & Peter R. Hartley & Yihui Lan, 2018. "Asian Spot Prices for LNG and other Energy Commodities," The Energy Journal, , vol. 39(1), pages 123-142, January.
    5. Huang, Kuan-Ming & Etienne, Xiaoli, 2021. "Do natural hazards in the Gulf Coast still matter for state-level natural gas prices in the US? Evidence after the shale gas boom," Energy Economics, Elsevier, vol. 98(C).
    6. Wiggins, Seth & Etienne, Xiaoli, 2015. "US Natural Gas Price Determination: Fundamentals and the Development of Shale," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205788, Agricultural and Applied Economics Association.
    7. Aït-Youcef, Camille & Joëts, Marc, 2024. "The role of index traders in the financialization of commodity markets: A behavioral finance approach," Energy Economics, Elsevier, vol. 136(C).
    8. Ames, Matthew & Bagnarosa, Guillaume & Matsui, Tomoko & Peters, Gareth W. & Shevchenko, Pavel V., 2020. "Which risk factors drive oil futures price curves?," Energy Economics, Elsevier, vol. 87(C).
    9. Ordu, Beyza Mina & Oran, Adil & Soytas, Ugur, 2018. "Is food financialized? Yes, but only when liquidity is abundant," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 82-96.
    10. Simona Delle Chiaie & Laurent Ferrara & Domenico Giannone, 2022. "Common factors of commodity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 461-476, April.
    11. Morana, Claudio, 2013. "Oil price dynamics, macro-finance interactions and the role of financial speculation," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 206-226.
    12. Hasanli, Mübariz, 2024. "Re-examining crude oil and natural gas price relationship: Evidence from time-varying regime-switching models," Energy Economics, Elsevier, vol. 133(C).
    13. Sun, Zesheng & Wang, Yaoqing & Zhou, Xu & Yang, Lunan, 2019. "The roundabout from interest rates to commodity prices in China: The role of money flow," Resources Policy, Elsevier, vol. 61(C), pages 627-642.
    14. Gatfaoui, Hayette, 2016. "Linking the gas and oil markets with the stock market: Investigating the U.S. relationship," Energy Economics, Elsevier, vol. 53(C), pages 5-16.
    15. Liu, Li & Wang, Yudong & Wu, Chongfeng & Wu, Wenfeng, 2016. "Disentangling the determinants of real oil prices," Energy Economics, Elsevier, vol. 56(C), pages 363-373.
    16. Sylvain Leduc & Kevin Moran & Robert J. Vigfusson, 2023. "Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications," The Review of Economics and Statistics, MIT Press, vol. 105(2), pages 392-407, March.
    17. repec:ipg:wpaper:19 is not listed on IDEAS
    18. Gatfaoui, Hayette, 2019. "Diversifying portfolios of U.S. stocks with crude oil and natural gas: A regime-dependent optimization with several risk measures," Energy Economics, Elsevier, vol. 80(C), pages 132-152.
    19. Christopher R. Knittel & Robert S. Pindyck, 2016. "The Simple Economics of Commodity Price Speculation," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 85-110, April.
    20. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    21. Dedi, Valentina & Mandilaras, Alex, 2022. "Trader positions and the price of oil in the futures market," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 448-460.

    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:sae:enejou:v:38:y:2017:i:2:p:201-228. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.