David Givens Sreekanth Venkataraman Factors determining U.S. natural gas prices post 2008: a Structural VAR analysis delivered to the 36th North American conference of USAEE/IAEE Washington, D.C. September 24, 2018 David Givens Sreekanth Venkataraman

Structural VAR: a framework to sort drivers

Overview and summary Decoupling of crude oil and natural gas followed by shale gale Structural vector autoregressive model analyzed determinants Economic reasoning imposed restrictions on model Study period 2008-2017 Lag criteria test: 1 Impulse response functions on natural gas prices by determinants was consistent with economic reasoning Only three determinants really count

Methodology Structural vector autoregression model allows for endogeneity of fundamental variables Monthly data was necessary to include all variables Matrix for instantaneous interaction among the variables With the number of lags at one, future values can be predicted among variables most approaches treat gas inventories exogenous with respect to the natural gas prices.

Variables/data Crude oil price Industrial consumption Natural gas exports Rig count Natural gas imports Storage Natural gas futures price BTU price spread Temperature Natural gas price We started by thinking that storage and rig count most significant, futures prices less than in past

Economic reasoning for restrictions   Crude Oil Price Natural Gas Exports Natural Gas Imports Natural Gas Futures Price Temperature Natural Gas Industrial Consumption Rig Count Storage BTU Price Spread Natural Gas Price Crude Oil Price * Natural Gas Exports Natural Gas Imports Natural Gas Futures Price  * Rig Count BTU Price Spread Natural Gas Price Rows: equations Columns: Impact of variable in equation Should there not be a diagonal of zeroes? Perhaps not include. And some are blank. Do highlights?

Economic restrictions in contemporaneous matrix Crude oil price: impact on rig count and BTU price spread, not natural gas price Natural gas exports: impact on natural gas price Natural gas futures price: impact on all except the rig count Natural gas industrial consumption: impact on all variables Temperature is likely to have a lagged impact on rig count and industrial consumption Natural gas exports, rig count also likely to have lagged impact on industrial consumption Do limitations in the matrix affect limitations in the impulse response

Results expressed in impulse response Based on one standard deviation of respective structural shock The percentage change in the natural gas price over 12 months as a reaction to the standardized shock of the respective variable Meaningful impact: Natural gas futures price Heating degree days Cooling degree days Imports

HDD impulse response sustained for year X axis: Percent change in natural gas price as a reaction to the shock Y axis: Months

Gas futures have major impact on gas prices X axis: Percent change in natural gas price as a reaction to the shock Y axis: Months

CDDs: Reduce price when not cold enough X axis: Percent change in natural gas price as a reaction to the shock Y axis: Months

When imports rise, prices get a bump X axis: Percent change in natural gas price as a reaction to the shock Y axis: Months

Forecast Error Variance Decomposition Analysis Analyzes relative contribution of variables; uses SVAR results Result is the fraction of gas price variance that can be explained by other variables over 12 month period Confirmatory HDDs (negligible month 1, 20% month 12) Gas futures prices (72% month 1, 35% month 12) High impact Rig count (9% month 1, 4% month 12) Crude oil prices (1% month 1, 21% month 12)

Conclusions Structural VAR finds that cold weather, gas futures and imports have the greatest impact on natural gas prices Decomposition analysis confirms prominence of HDDs, futures Natural gas production associated with crude oil should spur reconsideration Different restrictions on the model should prompt multivariate study including crude oil prices, rig count Decoupling from oil prices that began a generation ago is critical for policy makers to understand. Here are the other factors.

Author contact information David Givens, head of Natural Gas and Power Services, Argus Media Telephone: (240) 460-7243 Email: davidgivens105@gmail.com Sreekanth Venkataraman, consulting economist Telephone: (518) 698-9303 Email: vsree2930@gmail.com