What drives natural gas prices? - A structural VAR approach

- In the short-run natural gas prices are affected by temperature and supply shocks.
- Coal and oil prices are major determinants for natural gas prices in the long-run.
- Price effect of the Russian-Ukrainian gas dispute is offset by financial crisis.
- Supply shortfalls from Libya in 2011 and Russia in 2012 have limited price impact.
- We find evidence of efficient gas storage operation in Germany.

In this study, we develop a structural vector autoregressive model (VAR) for the German natural gas market. Our setup allows us to analyze the determinants of the natural gas price in a comprehensive framework. In particular, we illustrate the usefulness of our approach by disentangling the effects of different fundamental influences on gas prices during three recent supply interruptions: the Russian-Ukrainian gas dispute of January 2009, the Libyan civil war in 2011 and the withheld Russian exports in February 2012. Our results show that the natural gas price is affected by temperature, storage and supply shortfalls in the short term, while the long-term development is closely tied to both crude oil and coal prices, capturing the economic climate and the substitution relationship between the different energy commodities.