Re-examining crude oil and natural gas price relationship: Evidence from time-varying regime-switching models

• Published in: Energy economics Vol. 133; p. 107510
• Main Author: Hasanli, Mübariz
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.05.2024
• Subjects: Gas prices; Nonlinearities; Oil prices; Structural breaks; Oil prices; Gas prices; Structural breaks; C32; C01; Nonlinearities; C51; Q41
• ISSN: 0140-9883
• DOI: 10.1016/j.eneco.2024.107510

In this paper, we re-examine the relationship between crude oil and natural gas prices. Using a more flexible modelling approach, we find that the relationship between these two prices are more complex than previously documented. Specifically, we find that both the short-run and long-run relationships are highly nonlinear and shifted considerably over time. The effects of oil prices on gas prices fell significantly and became less volatile after 2011. We also find a significant shift and nonlinearity in the short-run response of gas prices to demand and supply conditions. Overall, our results imply that the natural gas prices did not decouple from crude oil prices in the sense that the long-run equilibrium relationship between the two prices did not break completely, but instead moved to a new level. •Oil and gas price relationship is inherently asymmetric and prone to significant structural shifts.•Gas prices did not decouple from crude oil prices completely.•Natural gas prices became less sensitive to oil prices both in the short- and long-run.•The effects of supply-side and demand-side factors on gas prices are asymmetric and subject to shifts as well.•Observed relationship in the past may have little value, if any, to assess effects of big shocks or major policy changes.