Forecasting natural gas prices using cointegration technique

Abstract

AbstractThis paper uses Augmented Dickey‐Fuller and Phillips‐Perron technique for determining whether individual crude oil prices (West Texas Intermediate, Brent, Japan crude cocktail) and natural gas prices‐ Henry Hub (HH), National Balancing Point (NBP), European and Japanese liquefied natural gas (LNG) prices are stationary or non‐stationary. It then applies Johansen and Juselius cointegration technique for establishing long‐run correlation between respective oil prices and natural gas prices. The paper concludes that all individual series pertaining to oil and natural gas prices are non‐stationary and indeed having long‐run relationship, despite short term drift. Ordinary least square method was used to forecast individual natural gas prices in various markets, assuming of course, that historical relationship continues to hold with respective oil prices throughout the forecasting period. Natural gas prices in each of the markets are expected to be stronger during 2005–25 as compared to respective historical average prices showing the tightness of the market. The mean NBP and HH forecast during 2005–25 are expected to be 92 and 84 per cent stronger than the historical average, whilst LNG prices in Japan continue to exhibit stronger trends during the forecast period as compared to rest of the markets in Europe and North America ‐ showing greater dependency of imports and security of supply considerations.