Abstract
The shale gas developments over the last two decades have challenged the gas price linkage with crude oil. The decoupling of the US wholesale gas from oil markets is mainly attributed to the rapid development of unconventional production, which formed a regional natural gas market based on regional market fundamentals. Moreover, investments in exporting facilities in the US made more quantities available to the rest of the world making global integration more plausible. This paper provides empirical evidence on the price and volatility transmission among the main European (NBP and TTF) and the Japan-Korean Marker (JKM) gas markets with that of Brent crude oil market, a crude oil benchmark used in Europe and Asia. The paper provides evidence that there are no price spillovers among oil and gas in European gas hubs. The European markets, contrary to the JKM market, seem to be mature enough as in the case of the US gas market. Finally, the paper provides policy recommendations on key elements for establishing functional gas hubs.Keywords: natural gas and oil markets; price and volatility spillovers; Europe, JapanJEL Classifications: Q40, Q41, C5DOI: https://doi.org/10.32479/ijeep.9774
Highlights
Potential spillovers among crude oil and natural gas markets is a long-standing issue of research and business community due to its dynamic nature
Time Domain Causality Tests We start with the National Balancing Point (NBP) as it is the oldest virtual trading points (VTP) in Europe and a role model for all the later gas hubs
Integration advances with different paces around the globe. This is why we find fully integrated gas hubs (NBP and Title Transfer Facility (TTF)), while Japan-Korean Marker (JKM) turned to integration after the nuclear power rebound
Summary
Potential spillovers among crude oil and natural gas markets is a long-standing issue of research and business community due to its dynamic nature. An example was the natural gas pipeline contracts when many countries used long-term oilindexed contracts because benchmarking offered the competitive advantage of substitution against oil, as well as transparency, avoiding price upsets from a non-liquid natural gas market. LNG terminals were constructed in an attempt to diversify suppliers. This led to contracting changes since countries could order quantities from suppliers even if there were no network connections. This drove the developments and Russia and Qatar emerged as swing producers between Europe and Asia. Asian markets become even more important as China increases its imports from Russia, while Japan and Korea follow suit
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