The Reaction of the Natural Gas Price to the Changes of the Crude Oil Price in Europe and American Regional Gas Markets: MSVAR Approach

This paper examines the response of natural gas prices to crude oil prices in Europe and America. Gas price variations in regional markets mostly follow crude oil prices. Economic variables such as oil and gas prices fluctuate substantially over time. We find that nonlinear models are preferable to linear regression for the study of such fluctuations. The regime switching model provides a flexible and dynamic framework for the study of sudden changes. In this paper, we use the MSVAR approach to study the impact of oil price changes on gas prices during the period of January 1996 to June 2017. This relationship changes with time, during certain periods oil price has a positive effect on gas prices while during other times it has a negative effect. In Europe, the first lag of oil price has a negative effect for 1 month, and positive one for 16 months. During both time periods, the second lag effect of oil prices on gas prices are positive. In the United States, there was a positive effect for the first lag of oil price for 2 months. The second lag of oil price had a positive impact on gas prices for 22 months. The Granger causality test supports the thesis that changes in oil prices are the Granger cause of changes in gas prices.