Abstract
We investigate the pricing formation of natural gas markets on three different continents (Europe, Asia and North America). We find that natural gas markets showed a strong relationship with the crude oil market between 1992 and 2001 and natural gas prices tended to thermal parity with crude oil prices. From 2002 natural gas markets exhibited a less pronounced relationship with the crude oil market and major natural gas markets were severely underpriced compared to crude oil. A globally integrated natural gas market, comparable to the global oil market, has not evolved. The main natural gas markets, however, exhibit some level of integration, especially over a longer time. The European market exhibits the strongest levels of integration, while the North American market exhibits the weakest.
Highlights
This paper investigates the price formation and the relationship of major natural gas benchmarks to the market for oil
Prices are measured on the left-hand side (LHS) in $/MMBtu and the residuals are measured on the right-hand side (RHS) in $/MMBtu
We have investigated the price formation of international natural gas markets and their relationships with each other and the global crude oil market
Summary
This paper investigates the price formation and the relationship of major natural gas benchmarks to the market for oil. We show the descriptive statistics of Japanese LNG, Russian and US natural gas prices in $/MMBtu and oil prices in $/bbl. The ADF test rejects the unit root in Japanese LNG and in crude oil prices, while the PP test rejects the same null hypothesis in the case of US natural gas price only at a 4% significance level. Russian gas prices are not integrated with US gas prices, NBP prices exhibit significant integration with the US gas market confirming the results of [22] and the results of [23,24]
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