Financialization, fundamentals, and the time-varying determinants of US natural gas prices

Increasing empirical evidence shows that natural gas prices have decoupled from oil prices. Yet there remains an open question as to what are the determining factors of natural gas prices following the demise of oil-indexation. This paper aims to address this question using a dynamic model averaging (DMA) approach. DMA can help identify key/important price determinants, and importantly, does so within a time varying framework allowing us to document how the set of determinants has evolved in response to key market changes. Using time series data between 2001 and 2018, we demonstrate a clear declining role of oil prices in the natural gas pricing mechanism, verifying the demise of indexation. Market or fundamental factors, such as weather, demand and supply conditions, have at the same time become more important. In addition, our results illustrate an increasing role from financial markets, captured by speculation related variables, providing empirical evidence to support the recent literature on commodity market financialization. The rising impact of speculation to natural gas prices introduces questions over how to balance market efficiency and risk management in the post-indexation regime. (C) 2019 Elsevier B.V. All rights reserved.