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Shale Gas Boom Affecting the Relationship Between LPG and Oil Prices

Atle Oglend, Morten E. Lindbäck, and Petter Osmundsen

Year: 2015
Volume: Volume 36
Number: Number 4
DOI: 10.5547/01956574.36.4.aogl
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Abstract:
Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil. This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.



Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price

Frank Asche, Atle Oglend, and Petter Osmundsen

Year: 2017
Volume: Volume 38
Number: Number 2
DOI: 10.5547/01956574.38.2.fasc
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Abstract:
When natural gas prices are subject to periodic decoupling from oil prices, for instance due to peak-load pricing, conventional linear models of price dynamics such as the Vector Error Correction Model (VECM) can lead to erroneous inferences about the nature of cointegration relationships, price adjustments and relative values. We propose the use of regime-switching models to address these issues. Our regime switching model uses price data to infer whether pricing is oil-driven (integrated) or gas-specific (decoupled). We find that UK natural gas (NBP) and oil (Brent) are cointegrated for the majority of the sample considered (1997-2014). UK gas prices tend to decouple during fall and early winter, when they increase relative to oil consistent with seasonal demand for natural gas creating gas-specific pricing. When evidence favors integrated markets, we find that the industry 10-1 rule-of-thumb holds (the value of one MMbtu of natural gas in the UK market is one tenth the value of one barrel of Brent oil), while the overall relationship, including decoupling periods, is 9.2-1. The paper highlights that what relative value to use, depends on the purpose of its use.



Time Commitments in LNG Shipping and Natural Gas Price Convergence

Atle Oglend, Petter Osmundsen, and Tore Selland Kleppe

Year: 2020
Volume: Volume 41
Number: Number 2
DOI: 10.5547/01956574.41.2.aogl
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Abstract:
Inter-continental Liquefied Natural Gas (LNG) trade can facilitate the development of a global natural gas market. However, in addition to explicit shipping costs, such trade requires time commitments in shipping due to the long hauls of many shipping routes. We show that this time commitment adds an additional economic cost to LNG shipping, and creates a positive relationship between the economic cost of LNG trade and regional natural gas price spreads. Necessary time commitment therefore augments the other costs of LNG trade, and contributes to weaken the ties between global natural gas markets.





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