Olsen, Kyle (2010-12). Price Discovery in the Natural Gas Markets of the United States and Canada. Master's Thesis. Thesis uri icon

abstract

  • The dynamics of the U.S. and Canada natural gas spot markets are evolving through deregulation policies and technological advances. Economic theory suggests that these markets will be integrated. The key question is the extent of integration among the markets. This thesis characterizes the degree of dynamic integration among 11 major natural gas markets, six from the U.S. and five from Canada, and determines each individual markets' role in price discovery. This is the first study to include numerous Canadian markets in a North American natural gas market study. Causal flows modeling using directed acyclic graphs in conjunction with time series analysis are used to explain the relationships among the markets. Daily gas price data from 1994 to 2009 are used. The 11 natural gas market prices are tied together with nine long-run co-integrating relationships. All markets are included in the co-integration space, providing evidence the markets are integrated. Results show the degree of integration varies by region. Further results indicate no clear price leader exists among the 11 markets. Dawn market is exogenous in contemporaneous time, while Sumas market is an information sink. Henry Hub plays a significant role in the price discovery of markets in the U.S. Midwest and Northeast, but little to markets in the west. The uncertainty of a markets' price depends primarily on markets located in nearby regions. Policy makers may use information on market integration for important policy matters in efforts of attaining efficiency. Gas traders benefit from knowing the price discovery relationships.
  • The dynamics of the U.S. and Canada natural gas spot markets are evolving through
    deregulation policies and technological advances. Economic theory suggests that these
    markets will be integrated. The key question is the extent of integration among the
    markets. This thesis characterizes the degree of dynamic integration among 11 major
    natural gas markets, six from the U.S. and five from Canada, and determines each
    individual markets' role in price discovery. This is the first study to include numerous
    Canadian markets in a North American natural gas market study.
    Causal flows modeling using directed acyclic graphs in conjunction with time
    series analysis are used to explain the relationships among the markets. Daily gas price
    data from 1994 to 2009 are used. The 11 natural gas market prices are tied together with
    nine long-run co-integrating relationships. All markets are included in the co-integration
    space, providing evidence the markets are integrated. Results show the degree of
    integration varies by region. Further results indicate no clear price leader exists among
    the 11 markets. Dawn market is exogenous in contemporaneous time, while Sumas
    market is an information sink. Henry Hub plays a significant role in the price discovery of markets in the U.S. Midwest and Northeast, but little to markets in the west. The
    uncertainty of a markets' price depends primarily on markets located in nearby regions.
    Policy makers may use information on market integration for important policy
    matters in efforts of attaining efficiency. Gas traders benefit from knowing the price
    discovery relationships.

publication date

  • December 2010