Presentation on theme: "The relationship between spot and contract gas prices Asche, Osmundsen and Oglend University of Stavanger, Norway IAEE 2011."— Presentation transcript:
The relationship between spot and contract gas prices Asche, Osmundsen and Oglend University of Stavanger, Norway IAEE 2011
Introduction A common market for energy? – The price on contract gas in Europe has historically been linked to the oil price – Oil and gas markets have been integrated in Europe (Asche, Osmundsen, Tveterås, 2002) – Gas traded on oil linked contracts generate a fundamental connection between gas and oil prices – Customers demand energy, fundamental substitution relationship (takes time) – Gas sub-product of Oil production
Introduction Market changes – Increased spot trading of gas in later years (NBP) – New developments in gas infrastructure (Interconnector) – Liquefied Natural Gas – Gas is increasingly used in electricity generation Competes against coal and nuclear – US and European shale gas – Seasonality effects, peak load pricing
Topic to be analysed How has changes in the oil and gas markets affected the relative prices of oil and gas? A stable relationship or structural changes? Systematic component in variations due to seasonality in gas prices? Significant trends?
Previous studies on market integration USA: – Serletis and Herbert (1999), study energy prices in the mid-Atlantic area, and find that in this region natural gas is competing with oil, but not electricity. – Emery and Lui (2002) analyze natural gas and electricity futures on the West Coast and show that electricity and natural gas are competing in that particular market segment. Europe: Two studies have been conducted on spot gas price and oil price in the UK – Asche et al. (2006): period 1995-1998 – In this period, after deregulation, but before Interconnector became operational, when UK was an autarky, the markets for oil and gas where integrated – Panagiotidis and Rutledge (2007): period 1996-2003 – The two markets are integrated in the whole period
Previous studies on volatility Mu (2007) examines how weather shocks impact prices in the US natural gas futures market. They find a significant weather effect on conditional mean and the conditional volatility. Pindyck (2004a,b) tests for a significant trend in volatility. A statistically significant and positive time trend is found for natural gas, but it is too small to have any economic importance. Ewing et al. (2002) examine volatility transmission between two stock price indexes consisting of major companies in the oil and gas sector. Evidence is found of a significant volatility transmission from the natural gas sector to oil sector but not vice versa.
Oil versus gas price Asche, F., Øglend, A., Osmundsen, P. and M. Sikveland (2010), "Volatility and risk sharing in European gas markets", paper presented at the 11th European IAEE conference, Vilnius, August 25-28, 2010.
Empirical Investigation Data: – Brent, NBP Spot – Weekly observations from week 38 1996 to week 14, 2010 – Series analysed: ln(Brent/NBP)
Empirical Investigation Method: – Two state regime shift model (Hamilton,1989) – Accounting for periodic structural shifts due to possible seasonality effects. – We allow for regime shifts in: Mean Volatility – Non-regime shift components AR terms Linear Trend
Model evaluation Regime shift model is evaluated against its linear counterpart model – Negative skewness in linear model (-026) Accounted for by regime shift model (0.027) – Excess kurtosis in linear model(3.79) To a large degree accounted for(0.97) Non-deterministic seasonality in linear model (Hansen instability test) Likelihood ratio test reject the linear model – LR=101.94
Empirical Findings Regime 1: – Most persistent (Prob. of regime change 0.098) – Less volatile than regime 2 – brent price > gas price (relative to regime 2) Regime 2: – Prob. of regime change 0.206 – Volatility scaled up by a factor of 6.8 – Intercept is zero
Empirical Findings Regimes are seasonally dependent – Suggests that regime 2 is associated with the seasonal regime where gas is relatively more expensive (winter) Oil becoming more expensive relative to Gas – Trend is revealed when accounting for the winter gas prices.
Concluding Remarks We find evidence for a non-linear relationship between oil and gas prices Changing levels of volatility Non-constant intercept Periodic non-deterministic seasonality Positive trend – Oil has become more expensive relative to gas