Convergence of European spot market prices for natural gas? A real-time analysis of market integration using the Kalman Filter

Abstract

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Global LNG Pricing Terms and Revisions: An Empirical Analysis

“…Recent work on global gas markets by Neumann et al (2006), Neumann and Cullmann (2012), and Li et al (2014) has shied away from a cointegration framework where prices are tightly linked in favor of the Kalman filter that captures gradual price convergence. These papers also acknowledge the important role of oil-indexed long-term contracts.…”

“…Neither paper considers structural change or distinguishes between pairs of trading partners. In Neumann et al (2006) and Neumann and Cullmann (2012), the authors relax the assumption of a stable empirical pricing relationship, but remain within the framework of a spot-market. Using a timevarying Kalman filter, they show that European gas markets have become more tightly integrated over time.…”

“…This technique does not characterize discrete structural breaks that could result from contract revisions as mine does; instead, it tends to characterize smooth changes. Li et al (2014) extend Neumann et al (2006) and Neumann and Cullmann (2012) by using tests for statistical convergence among multiple series to examine the convergence of gas prices between 1997 and 2011. They examine prices in South Korea, Taiwan, Japan, North America, and the United Kingdom (U.K.), and they conclude that Asian and European gas markets are integrated because of contractual links to oil prices, not arbitrage in a spot market.…”

“…Some recent papers on regional gas markets acknowledge that these markets are not well arbitraged. To model the degree and speed of gradual market convergence, these articles replace a cointegration framework with the Kalman filter (Li et al 2014;Neumann et al 2006;Neumann and Cullmann 2012). Allowing for gradual integration seems appropriate for LNG markets because the majority of LNG has been traded under confidential, bilateral long-term contracts (LTCs) since the 1960s, not in a liquid spot market that responds rapidly to market conditions.…”

Linking Natural Gas Markets - Is LNG Doing its Job?

“…For the UK market, that has been liberalized 15 years earlier than Continental Europe, Panagiotidis and Rutledge (2007) show that the linkage between the natural gas price and the price of oil has become more volatile over time which can be interpreted as a sign of decoupling of the natural gas price from the oil price. Neumann et al (2006) have shown that integration between the UK market and the largest Continental European wholesale market (Zeebrugge) works well, but that price convergence between different Continental European markets is still to come about. Last but not least, Siliverstovs et al (2005) were the first to address the issue of international market integration for natural gas; they concluded that for the period preceeding liberalization of natural gas markets in Europe, i.e.…”