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

See all articles by David J. Ramberg

David J. Ramberg

Massachusetts Institute of Technology (MIT)

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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

Ramberg, David J. and Parsons, John E., The Weak Tie Between Natural Gas and Oil Prices (November 9, 2010). Center for Energy and Environmental Policy Research (CEEPR) No. 10-017. Available at SSRN: https://ssrn.com/abstract=1710686 or http://dx.doi.org/10.2139/ssrn.1710686

David J. Ramberg

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

John E. Parsons (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~jparsons/

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