Relationship Between Crude Oil And Natural Gas Prices

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This paper examines the relationship between crude oil and natural gas prices. The prices of natural gas and crude behave much as any other commodity experiencing wide price swings in times of shortage or oversupply. The paper tests data from 1985-2000 using regression analysis to substantiate the relationship between the two commodities and further throws light on the reasons for deviation of natural gas prices from crude oil prices…

Introduction

Observing the pattern of crude oil and natural gas prices generally supports the economic theory and leads to the belief that both commodities do share a relationship. However, over the past few years, a decoupling of natural gas prices from crude oil prices has been observed (refer to graph 1.1 in appendix). This has led concerns over the strength of the relationship between crude and natural gas prices.
Economic factors link crude oil and natural gas prices through supply and demand. There has been a strong conviction regarding the one-way relationship between the prices of crude oil and natural gas, whereby changes in crude figures influence natural gas prices and any changes in natural gas prices have no impact on crude. This is due to the relative size of each market. Prices of crude are determined on the world market whereas natural gas valuation takes place in regionally segmented markets. As a result, any adverse event or condition is unlikely to affect the global price of oil (Villar, Joutz)
This paper attempts to signify the economic and statistical relationship between crude oil and natural gas prices. The period under review is from 1985 to 2005. ...
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