Financialization in the US natural gas market and its influence on natural gas spot price dynamics
Polikarpova, Maria (2016)
Pro gradu -tutkielma
Polikarpova, Maria
2016
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2016120830514
https://urn.fi/URN:NBN:fi-fe2016120830514
Tiivistelmä
This thesis examines the influence of financialization of natural gas (NG) market or noncommercial traders on NG spot price in the US. As NG futures contract is one of the most popular instruments for speculators and it provides price discovery for NG spot price in the future, the dynamics of spot-futures prices are analyzed during the periods from 1997 to 2003 and from 2004 to 2016, respectively.
The descriptive statistics and the cointegration analyses demonstrated higher volatility of NG prices in the later period, as well as more persistent influence of shocks on the short- and long-term relationships between NG spot and futures prices. The seasonality analysis showed that summer period (in addition to winter period) has started to impact on NG spot price possibly due to wider application of NG as a fuel in increasing number of gas fired electrical power plants in the US.
The forecasting models of NG spot prices based on NG futures prices (or bases) and other explanatory variables did not show changes in patterns after 2003 and, therefore, the results demonstrate that noncommercial traders did not cause high fluctuations in NG prices. However, it was found that short positions of noncommercial traders had influenced NG spot price during the period from 1998 to 2010 when NG prices suffered from several high spikes and dips. At the same time, the estimate of maximum temperature anomaly was close to significant. These results can be attributed to special conditions of NG market at that time (weather disasters, inelastic demand, concentrated supply, unregulated NG price, and starting of shale gas extraction).
This thesis also suggests a trading strategy based on NG futures contracts. It shows that in calm time a negative basis (NG spot price net NG futures contract with 1-month maturity) should be a signal to long position in NG futures contract with 1-month maturity, whereas a positive basis should be a signal to short position in the same contract. However, the long and short positions for one-month NG futures need to be avoided or protected by call and put options during the period from November to January, as the dynamics of natural gas price is unpredictable in the conditions of weather anomalies and inelastic demand for NG.
The descriptive statistics and the cointegration analyses demonstrated higher volatility of NG prices in the later period, as well as more persistent influence of shocks on the short- and long-term relationships between NG spot and futures prices. The seasonality analysis showed that summer period (in addition to winter period) has started to impact on NG spot price possibly due to wider application of NG as a fuel in increasing number of gas fired electrical power plants in the US.
The forecasting models of NG spot prices based on NG futures prices (or bases) and other explanatory variables did not show changes in patterns after 2003 and, therefore, the results demonstrate that noncommercial traders did not cause high fluctuations in NG prices. However, it was found that short positions of noncommercial traders had influenced NG spot price during the period from 1998 to 2010 when NG prices suffered from several high spikes and dips. At the same time, the estimate of maximum temperature anomaly was close to significant. These results can be attributed to special conditions of NG market at that time (weather disasters, inelastic demand, concentrated supply, unregulated NG price, and starting of shale gas extraction).
This thesis also suggests a trading strategy based on NG futures contracts. It shows that in calm time a negative basis (NG spot price net NG futures contract with 1-month maturity) should be a signal to long position in NG futures contract with 1-month maturity, whereas a positive basis should be a signal to short position in the same contract. However, the long and short positions for one-month NG futures need to be avoided or protected by call and put options during the period from November to January, as the dynamics of natural gas price is unpredictable in the conditions of weather anomalies and inelastic demand for NG.