The Relationship Between Natural Gas And Oil Prices in Regional Gas Markets

The relationship between natural gas and crude oil prices is one of the most important topics for gas pricing. In conventional gas pricing methods, gas prices are often formulated as a crude oil or oil products prices. In recent years establishment of regional hubs lead to prevalence of gas-to-gas pricing mechanism, in which relative prices of oil and gas do not follow the pricing rules. Moreover, in the wake of unconventional gas supplies in North America and widening the differential between oil and gas prices, some debate appeared on the possibility of decoupling gas prices from being oil indexed. Under these circumstances, the question that always arises is that despite short-term fluctuations in relative prices of oil and gas, is there a long-term relationship between natural gas prices and oil price? In this paper, short-term and long-term dynamics between gas prices and oil prices in four major regional markets (North America, the UK, Asia and Europe) have been studied. The findings of the study indicate that although price of natural gas is decoupled from oil in North America, there is a significant co-integration relationship between oil and gas prices in UK and European markets as well as Asian markets