Turbulent times: Uncovering the origins of US natural gas price fluctuations since deregulation

- A sign-identified structural vector autoregression model is applied to the US natural gas market.
- Natural gas prices in the US are predominately determined by supply and demand shocks.
- The price elasticities of natural gas supply and demand have increased in absolute magnitudes.
- The causes of several recent volatile market episodes are examined.

In this paper, we investigate supply and demand shocks in the U.S. natural gas market, focusing on how the effects of these shocks have changed over time. Using a sign-identified structural vector autoregression (SVAR) model that allows for both time-varying parameters and stochastic volatility, we find that supply and demand shocks are the main drivers of natural gas price fluctuations during 1993-2015, with speculative activities playing a minor role during a portion of the sample period. We also find that after the recent shale boom, the supply and demand of natural gas in the US have become somewhat more elastic. An examination of several volatile episodes during the sample period suggest that though natural gas price fluctuations are predominately determined by fundamental factors, supply and demand shocks have significantly evolved over time.