The Relationship of Natural Gas to Oil Prices

Hartley, Peter; Medlock, Kenneth B.; Rosthal, Jennifer Elizabeth

doi:10.5547/issn0195-6574-ej-vol29-no3-3

Cited by 182 publications

(127 citation statements)

References 13 publications

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“…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).…”

Section: Why Expect Structural Breaks?mentioning

confidence: 99%

“…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.…”

Section: Literature Review 21 Theory: Long-term Contracts In Lngmentioning

confidence: 99%

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Global LNG Pricing Terms and Revisions: An Empirical Analysis

Agerton¹

2017

The Energy Journal

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Asian long-term contracts for liquefied natural gas (LNG) are generally thought to index LNG prices to oil prices. This should mean that LNG and oil prices are cointegrated. However, statistical evidence for cointegration using Japanese data is not strong. To resolve this puzzle, I examine 16 Japanese, South Korean, Taiwanese, and Spanish LNG import price series and allow for multiple, unknown structural breaks in the relationship to oil prices. This resolves the puzzle, and I provide estimates for the timing of breaks and the underlying average pricing terms. I relate these to count, volume, and duration data on long-term contracts and discuss how to interpret econometric estimates in light of contract data. This paper complements existing work on global gas market integration, which largely ignores how discrete changes in oil-indexed long-term contracts will affect empirical relationships.

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Section: Why Expect Structural Breaks?mentioning

confidence: 99%

Section: Literature Review 21 Theory: Long-term Contracts In Lngmentioning

confidence: 99%

Global LNG Pricing Terms and Revisions: An Empirical Analysis

Agerton¹

2017

The Energy Journal

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“…Additionally, in Example 3, we use our model to show that in New England, the grid/market level fuel competition has become the major factor that determines the influence of oil prices on natural gas prices. The results of Example 3 contribute to the literature regarding the relationship between oil and natural prices [2,7,8,34,39,81]. Finally, in Example 4, we utilize the model to quantitatively investigate how changes in the demand for electricity influence the electric power and the fuel markets.…”

Section: Introductionmentioning

confidence: 89%

“…Huntington and Schuler [39] pointed out that historically, the oil price ($/barrel) and the natural gas price ($/MMBtu) had a 10:1 relationship because of the responsiveness of dual-fuel generating units in electric power networks (see also [2,8]). However, due to the decline of the number of dual-fuel plants and the deregulation of the electric power industry, the oil and natural gas prices have decoupled and become complex [34,7]. The interesting interactions among oil, electric power, and natural gas markets will also be quantitatively investigated using our theoretical model and empirical examples.…”

Section: Introductionmentioning

confidence: 99%

An integrated electric power supply chain and fuel market network framework: Theoretical modeling with empirical analysis for New England

Liu

Nagurney

2009

Naval Research Logistics

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In this paper, we develop a novel electric power supply chain network model with fuel supply markets that captures both the economic network transactions in energy supply markets and the physical network transmission constraints in the electric power network. The theoretical derivation and analysis are done using the theory of variational inequalities.We then apply the model to a specific case, the New England electric power supply chain, consisting of 6 states, 5 fuel types, 82 power generators, with a total of 573 generating units, and 10 demand market regions. The empirical case study demonstrates that the regional electric power prices simulated by the proposed model very well match the actual electricity prices in New England. We also compute the electric power prices and the spark spread, an important measure of the power plant profitability, under natural gas and oil price variations. The empirical examples illustrate that in New England, the market/gridlevel fuel competition has become the major factor that affects the influence of the oil price on the natural gas price. Finally, we utilize the model to quantitatively investigate how changes in the demand for electricity influence the electric power and the fuel markets from a regional perspective. The theoretical model can be applied to other regions and multiple electricity markets under deregulation to quantify the interactions in electric power/energy supply chains and their effects on flows and prices.

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“…Crude oil and natural gas are substitutes in consumption [6], factories and other consumers would shift energy input from oil to natural gas when the relative price of each energy type changes. Since natural gas is cheap in the US due to shale gas expansion, the demand for oil might decrease due to its substitution by natural gas through competition [7]. Therefore, the price of oil would also be plunged by shale gas boom.…”

Section: Introductionmentioning

confidence: 99%

The US Shale Gas Revolution and Its Externality on Crude Oil Prices: A Counterfactual Analysis

Liu¹,

Li²

2018

Sustainability

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Abstract:The expansion of shale gas production since the mid-2000s which is commonly referred to as "shale gas revolution" has had large impacts on global energy outlook. The impact is particularly substantial when it comes to the oil market because natural gas and oil are substitutes in consumption and complements and rivals in production. This paper investigates the price externality of shale gas revolution on crude oil. Applying a structural vector autoregressive model (VAR) model, the effect of natural gas production on real oil price is identified in particular, and then based on the identification, counterfactuals of oil price without shale gas revolution are constructed. We find that after the expansion of shale gas production, the real West Texas Intermediate (WTI) oil price is depressed by 10.22 USD/barrel on average from 2007 to 2017, and the magnitude seems to increase with time. In addition, the period before shale gas revolution is used as a "thought experiment" for placebo study. The results support the hypothesis that real WTI oil price can be reasonably reproduced by our models, and the estimated gap for oil price during 2007-2017 can be attributed to shale gas revolution. The methodology and framework can be applied to evaluate the economic impacts of other programs or policies.

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The Relationship of Natural Gas to Oil Prices

Cited by 182 publications

References 13 publications

Global LNG Pricing Terms and Revisions: An Empirical Analysis

Global LNG Pricing Terms and Revisions: An Empirical Analysis

An integrated electric power supply chain and fuel market network framework: Theoretical modeling with empirical analysis for New England

The US Shale Gas Revolution and Its Externality on Crude Oil Prices: A Counterfactual Analysis

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