1. What Drives Natural Gas Prices? Stephen Brown and Mine Yücel Federal Reserve Bank of Dallas

2. Natural Gas and Oil Prices

4. Pricing Rules of Thumb Do Oil Prices Matter?

5. Some Pricing Rules 10-to-1: Henry Hub price is 0.1P WTI 6-to-1: Henry Hub price is 0.1667P WTI Burner-tip parity: Henry Hub price is -0.25 +0.1325P WTI Based on competition with residual fuel oil

6. Old Rules of Thumb 0 3 6 9 12 15 19941995199619971998199920002001200220032004200520062007 10 to 1 Rule 6 to 1 Rule Actual Spot $/MMBtu

7. Burner-Tip Parity 0 3 6 9 12 15 19941995199619971998199920002001200220032004200520062007 Burner-Tip Parity Actual Spot $/MMBtu

8. Looking Beyond Pricing Rules of Thumb

9. Other Factors Weather Seasonality Storage Production Disruptions

10. U.S. Natural Gas Production

11. Natural Gas Storage 500 1000 1500 2000 2500 3000 3500 4000 5-Year Seasonal Average Billion cubic feet 5-Year Maximum 5-Year Minimum 2003200420052006

12. Natural Gas Storage 500 1000 1500 2000 2500 3000 3500 4000 20032004200520062007 Gas in Storage 5-Year Seasonal Average Projected Storage Billion cubic feet 5-Year Maximum 5-Year Minimum

13. Econometric Modeling Investigate the influence of –WTI –Weather –Seasonality –storage –production disruptions on natural gas prices.

14. Variables Price of HH Price of WTI Heating Degree Days Deviations from normal HDD Cooling Degree Days Deviations from CDD Storage Differential Shut in production

15. Results (1) Crude oil and natural gas prices move together in the long run Changes in crude oil prices lead changes in natural gas prices If the two prices move away from each other, relationship restored in 19 weeks

16. Results (2) Significant variables: +Price of crude oil +Heating degree days +HDD deviation from normal +CDD deviation from normal -Storage differential from seasonal norm +Shut-in production

17. Natural Gas Price Brown-Yücel Model

18. 0 3 6 9 12 15 19941995199619971998199920002001200220032004200520062007200820092010 $/MMBtu Natural Gas Price Outlook Actual Spot Price Futures Price, Nov 15 Long Run Relationship with Oil Long-Term Outlook

19. Natural gas price outlook

20. Conclusion Simple rules of thumb don’t explain natural gas prices well Natural gas prices not decoupled from oil –anchored to oil prices in the long run –Short run dynamics depend on other variables such as weather, storage and production disruptions Linkage likely to continue

21. What Drives Natural Gas Prices? Stephen Brown and Mine Yücel Federal Reserve Bank of Dallas