The end of a long term relationship between the price of crude oil and natural gas : a cointegration approach

Abstract

In this master thesis we explore the relationship between the natural gas price and crude oil price in the U.S. We find that the prices have been cointegrated in the period from 1997-2006, and that the prices have decoupled in the period after this. We have discussed factors explaining the historical coupling of the prices, and factors explaining why the prices have decoupled. We argue that the main reason for decoupling is the shale gas production boom in the U.S. We find no single main reason for the historical cointegration relationship, but argue that this is a sum of many different factors. Many of these based on an energy arbitrage argument. We also discuss the future outlook for this price relationship, with special focus on expectations about the future developments in the natural gas market. Following this we have a discussion around the implications of the currently low natural gas price, and high crude oil price on the economics of gas to liquids technology in the U.S. We