The Power Play of Natural Gas and Crude Oil in the Move towards the Financialization of the Energy Market

The financialization of the energy market has capacitated energy commodities to affect economic activities unfathomably. Despite the availability of rich literature investigating crude oil and developing its strong ties with economic and financial stability and climate change, little attention has been paid to natural gas (NG or LNG) and its potential to affect economies. Natural gas is not merely an alternative fossil fuel and a substitute for crude oil but it also presents huge advantages in terms of cost and low carbon emission. This study contributes to the literature and provides meaningful evidence on how changes in natural gas futures prices affect the equity returns in G-5 economies using the data covering almost two decades. Our results present a few exciting insights. First, we find that oil and gas prices are weakly correlated and do not reflect the dependence of gas on oil as reported in previous studies. Second, we find that although gas price changes negatively affect equity market returns in the short run, it subsides substantially in the long run. Holistically, our findings identify the hedging potential that natural gas provides to cope with the volatility in crude oil prices. We also assert that substituting oil with natural gas may improve the sustainability and stability of financial markets in G-5 economies. \textcopyright 2022