A residual driven ensemble machine learning approach for forecasting natural gas prices: analyses for pre-and during-COVID-19 phases

Abstract

The natural gas price is an essential financial variable that needs periodic modeling and predictive analysis for many practical implications. Macroeconomic euphoria and external uncertainty make its evolutionary patterns highly complex. We propose a two-stage granular framework to perform predictive analysis of the natural gas futures for the USA (NGF-USA) and the UK natural gas futures for the EU (NGF-UK) for pre-and during COVID-19 phases. The residuals of the previous stage are introduced as a new explanatory feature along with standard technical indicators to perform predictive tasks. The importance of the new feature is explained through the Boruta feature evaluation methodology. Maximal Overlap Discrete Wavelet Transformation (MODWT) is applied to decompose the original time-series observations of the natural gas prices to enable granular level forecasting. Random Forest is invoked on each component to fetch the respective predictions. The aggregated component-wise sums lead to final predictions. A rigorous performance assessment signifies the efficacy of the proposed framework. The results show the effectiveness of the residual as a feature in deriving accurate forecasts. The framework is highly efficient in analyzing patterns in the presence of a limited number of data points during the uncertain COVID-19 phase covering the first and second waves of the pandemic. Our findings reveal that the prediction accuracy is the best for the NGF-UK in the pre-COVID-19 period. Also, the prediction accuracy of the NGF-USA is better in the COVID-19 period than the pre-COVID-19 period.

A Machine-Learning-Based Approach for Natural Gas Futures Curve Modeling

“…So far, the existing literature has mostly focused on the relations between NG and other commodities or securities (see, for instance, [38][39][40][41][42][43][44][45][46][47]), as well as on modeling price volatility (e.g., [48][49][50][51][52][53][54][55]), demand and supply (e.g., [56][57][58][59][60][61][62][63][64]), spot prices (e.g., [65][66][67][68][69][70][71][72][73][74][75][76]) or futures prices of individual contracts (e.g., [77][78][79]). Relatively less attention has been paid to NG futures prices term structure modeling and forecasting and only a few studies have partly tackled the issues we are dealing with.…”