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What Drives Natural Gas Prices?

Abstract:
For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past seven years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Natural Gas – Markets and Prices; Electricity – Generation Technologies

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q2 -

Keywords: Natural gas, pricing, substitution, fuel oil, US, electricity generation

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-3


Published in Volume 29, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.