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What drives natural gas prices?

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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.

Suggested Citation

  • Stephen P. A. Brown & Mine K. Yücel, 2007. "What drives natural gas prices?," Working Papers 0703, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:0703
    Note: Published as: Brown, Stephen P.A. and Mine K. Yücel (2008), "What Drives Natural Gas Prices?," The Energy Journal 29 (2): 45-60.
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    JEL classification:

    • F0 - International Economics - - General

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