Research ArticleIntegration of physical and futures prices in the US natural gas market

- Test of integration between physical and futures prices of natural gas in the US.
- Futures prices are cointegrated with wellhead, industrial, power, and citygate prices.
- NG1 futures prices Granger cause all physical prices.
- Shocks to future prices have persistent effects on all physical prices.
- Hedging ratio should be higher than the case of a pure correlation between physical and futures prices.

This paper examines the integration between the prices of different types of physical (upstream/end-use) and futures contracts of natural gas in the US for the period of June 1990-Dec 2014. To examine the equilibrium relationship between physical and futures prices, several cointegration tests are applied. The study finds that (a) futures prices are cointegrated with wellhead, power, industrial, and citygate prices; (b) NG1 futures prices Granger cause all physical prices; (c) upstream physical prices Granger cause futures prices; (d) shocks to wellhead prices are the only ones among physical prices with persistent long-term effects; (e) shocks to futures prices have persistent effects on all physical prices; (f) futures contracts with a longer time-to-maturity explain a larger portion of commercial gas price variations; and (g) commercial and residential prices show different behavior compared to other physical prices in multiple tests.