The Weak Tie Between Natural Gas and Oil Prices
Center for Energy and Environmental Policy Research (CEEPR) No. 10-017
99 Pages Posted: 19 Nov 2010
Date Written: November 9, 2010
Abstract
Several recent studies establish that crude oil and natural gas prices are cointegrated. Yet at times in the past, and very powerfully in the last two years, many voices have noted that the two prices series appear to have “decoupled”. We explore the apparent contradiction between these two views. We find that recognition of the statistical fact of cointegration needs to be tempered with two additional points. First, there is an enormous amount of unexplained volatility in natural gas prices at short horizons. Hence, any simple formulaic relationship between the prices will leave a large portion of the price of natural gas unexplained. Second, the cointegrating relationship does not appear to be stable through time. The prices may be tied, but the relationship can shift dramatically over time. Therefore, although the two price series are cointegrated, the confidence intervals for both short and long time horizons are large.
Keywords: Oil Price, Natural Gas Price, Cointegration
JEL Classification: C32, E30, Q31
Suggested Citation: Suggested Citation
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