The dynamic linkages between crude oil and natural gas markets

The time varying price spillovers between natural gas and crude oil markets for the period 1994 to 2014 are investigated. Contrary to earlier research, we show that in a large part of our sample the natural gas price leads the price of crude oil with price spillover effects lasting up to two weeks. This result is robust to a battery of tests including out-of-sample forecasting exercises. However, after 2006, we detect little price dependencies between these two energy commodities. These findings arise due to a conjunction of both demand and supply-side shocks arising from both natural and economic events, including Hurricane Katrina, the Tohoku earthquake and the Global Financial Crisis, as well as infrastructure and technological improvements. The increased use of new technologies such as hydraulic fracking for the extraction of gas and oil in particular affected supply in the latter part of the study. We conclude that the long term relation present in the early part of the sample has decoupled, such that price determination of these two energy sources is now independent. - Highlights: • Contrary to earlier research we find natural gas may lead crude oil prices over a long sample. • This finding holds in forecasting out of sample. • There may be a break in the relationship between oil and gas in 2006. • We suggest that new technologies and financial conditions have led to a decoupling of these markets. • Oil and natural gas prices may now be determined independently.