The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate

Abstract

To the extent that energy sources can be substituted in end-uses, one might expect the prices of different fuels to be linked. High prices for one fuel will create incentives to substitute toward other fuels that are relatively less expensive. Consistent with this basic economic prediction, many authors have documented a tendency for the natural logarithm

Crude oil trade and current account deficits

“…See also Medlock et al (2011, p. 36) for optimistic assessments on the implications of the North American natural gas revolution for the US trade outlook. If these trends also influence exchange rates, it may alter the growth in global oil demand (Austvik, 1987;Brown and Phillips, 1984;De Schryder and Peersman, forthcoming, and Huntington, 1986) or recalibrate the relationship between prices of globally traded crude oil and domestically sourced natural gas within North America (Hartley and Medlock, 2014).…”

Evaluating the exchange rate and commodity price nexus in Malaysia: evidence from the threshold cointegration approach

“…He explained that substantial adjustments are necessary after prices rise due to changes in productivity. Moreover, oil and natural gas prices are cointegrated because these fuels can be substituted (Hartley and Medlock III 2014). There is also evidence that technological changes alter the substitutability between natural gas and oil products, which in turn impacts the nominal exchange rate.…”

Global LNG Pricing Terms and Revisions: An Empirical Analysis

“…In fact, a Zivot and Andrews (1992) test allowing for a single break in intercept and trend rejects a unit root at the 1 or 5% level for 10 of 16 series, plus Brent and JCC. The unit root properties of LNG and oil prices, however, are not the central focus of this paper, and to stay consistent with the extensive literature on the empirical oil-gas price relationship, I maintain a cointegration framework in which both variables have unit roots (Villar and Joutz 2006;Yücel 2008, 2009;Hartley et al 2008;Ramberg and Parsons 2012;Hartley and Medlock 2014;Brigida 2014). Furthermore, Bai and Perron (1998) and Kejriwal and Perron (2008b) show that the sup Wald test will consistently detect breaks whether regressors are stationary, trend-stationary or difference-Crude oil prices There are two logical choices for a crude oil benchmark: Brent crude and Japanese Crude Cocktail (JCC).…”

“…Tying LNG prices to a very liquid market is a way to reduce price volatility. Oil markets are the natural pricing point for LNG since marginal buyers of natural gas-power plants-can substitute between gas and oil products in the short term to arbitrage price differences (Hartley et al , 2008Hartley and Medlock 2014). Over longer horizons substitution is also possible on the supply side and in other areas of demand, such as residential heating.…”