How does the U.S. natural gas market react to demand and supply shocks in the crude oil market?*

- We use a structural VAR to disentangle demand and supply shocks in the oil market.
- The price of crude oil is an important determinant of the natural gas prices.
- Structural shocks in the crude oil market account for 45% of the variation in gas prices.
- The response of natural gas prices to an oil price shock depends on the source of shock.

In this paper we use monthly data (over the period from January 1976 to December 2012) and a structural VAR model to disentangle demand and supply shocks in the global crude oil market and investigate their effects on the real price of natural gas in the United States. We identify the model by assuming that innovations to the real price of crude oil are predetermined with respect to the natural gas market and show that close to 45% of the variation in the real price of natural gas can be attributed to structural supply and demand shocks in the global crude oil market.