Oil indexation, market fundamentals, and natural gas prices: An investigation of the Asian premium in natural gas trade

Zhang, D; Shi, M; Shi, X

Oil indexation, market fundamentals, and natural gas prices: An investigation of the Asian premium in natural gas trade

Zhang, D Shi, M Shi, X

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Publication Type:: Journal Article
Citation:: Energy Economics, 2018, 69 pp. 33 - 41
Issue Date:: 2018-01-01

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Field	Value	Language
dc.contributor.author	Zhang, D	en_US
dc.contributor.author	Shi, M	en_US
dc.contributor.author	Shi, X https://orcid.org/0000-0001-9653-7395	en_US
dc.date.available	2020-05-25T19:09:01Z
dc.date.issued	2018-01-01	en_US
dc.identifier.citation	Energy Economics, 2018, 69 pp. 33 - 41	en_US
dc.identifier.issn	0140-9883	en_US
dc.identifier.uri	http://hdl.handle.net/10453/132412
dc.description.abstract	© 2017 Elsevier B.V. A heated debate has arisen over whether the Asian premium (i.e., higher prices in Asia than elsewhere) in natural gas trade is due to price discrimination or different market fundamentals. Determining the origin of this premium can help to guide the gas industries and policy makers in Asia, especially when the traditional oil-indexed price mechanism fades away. Using a new systemic time-series approach, this paper explores the extent to which oil prices and market fundamentals contribute to variations in gas prices in Japan, the United States, and Germany. We find clear cross-country differences and time-varying patterns. Gas prices are much less affected by supply and demand factors than oil prices in Japan and Germany, whereas these factors are more important than oil prices in the US market, which has a pricing hub. Through rolling-windows and subsample analysis, we discover that oil prices were important in Japan and Germany, but the level of importance has declined significantly in recent years, though the contribution of fundamentals does not change much. The results show that Asian gas prices are determined more by oil prices than by the market fundamentals; thus the Asian premium is more likely due to this oil indexed pricing mechanism, rather than market fundamentals. This suggests that developing Asia's benchmark prices (through trading hubs) with a better reflection of regional specific fundamentals can lead to a more efficient allocation of gas resources.	en_US
dc.relation.ispartof	Energy Economics	en_US
dc.relation.isbasedon	10.1016/j.eneco.2017.11.001	en_US
dc.rights	info:eu-repo/semantics/openAccess
dc.subject.classification	Energy	en_US
dc.title	Oil indexation, market fundamentals, and natural gas prices: An investigation of the Asian premium in natural gas trade	en_US
dc.type	Journal Article
utslib.citation.volume	69	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	0906 Electrical and Electronic Engineering	en_US
utslib.for	0913 Mechanical Engineering	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/DVC (International)
pubs.organisational-group	/University of Technology Sydney/DVC (International)/Australia-China Relations Institute
utslib.copyright.status	open_access	*
pubs.publication-status	Published	en_US
pubs.volume	69	en_US

Abstract:

© 2017 Elsevier B.V. A heated debate has arisen over whether the Asian premium (i.e., higher prices in Asia than elsewhere) in natural gas trade is due to price discrimination or different market fundamentals. Determining the origin of this premium can help to guide the gas industries and policy makers in Asia, especially when the traditional oil-indexed price mechanism fades away. Using a new systemic time-series approach, this paper explores the extent to which oil prices and market fundamentals contribute to variations in gas prices in Japan, the United States, and Germany. We find clear cross-country differences and time-varying patterns. Gas prices are much less affected by supply and demand factors than oil prices in Japan and Germany, whereas these factors are more important than oil prices in the US market, which has a pricing hub. Through rolling-windows and subsample analysis, we discover that oil prices were important in Japan and Germany, but the level of importance has declined significantly in recent years, though the contribution of fundamentals does not change much. The results show that Asian gas prices are determined more by oil prices than by the market fundamentals; thus the Asian premium is more likely due to this oil indexed pricing mechanism, rather than market fundamentals. This suggests that developing Asia's benchmark prices (through trading hubs) with a better reflection of regional specific fundamentals can lead to a more efficient allocation of gas resources.

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http://hdl.handle.net/10453/132412