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Market Arbitrage: European and North American Natural Gas Prices

Abstract:
The development of an international market for liquefied natural gas (LNG) and the resulting opportunities for intercontinental arbitrage are seen as creating a world in which movements in natural gas prices are linked between continents. Increased flows of LNG into the United States and the potential sensitivity of these shipments to price differentials between Europe and North America suggests the possibility of a strengthening relationship between natural gas prices on these two continents. At the same time, there is considerable evidence linking natural gas price movements in Europe and North America to those for crude oil. Accordingly, we use a series of econometric tests to determine whether the co-movement between natural gas prices in Europe and North America is mediated through crude oil prices or is being shaped directly by gas-to-gas arbitrage.

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Energy Specializations: Natural Gas – Markets and Prices; Natural Gas – LNG Infrastructure

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
F18 - Trade and Environment

Keywords: Natural gas, LNG, US, EU, trade, cointegration, arbitrage

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-11


Published in Volume 30, Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.