| Research has shown that the Henry Hub natural gas price and the WTI crude oil price are cointegrated in the long run; however, the short term relationship between these two energy prices draws continued discussions and remains inconclusive so far. This paper uses advanced nonlinear time series method MARS VAR to study the dynamic relationship between natural gas price movements and crude oil prices over the past 14 years of daily data. The main finding is that WTI crude oil prices were causally prior to Henry Hub natural gas prices prior to 2004. After this period a decoupling occurred that was captured by the MARS VAR model but not seen in other research using vector error correction model (VECM) that does not support thresholds. Moreover, the out-of-sample forecasting power of MARS VAR is superior to VECM, which based on the cointegration assumption. The research findings may have significant implications of commodity pricing, hedging, and risk management to natural gas local distribution company (LDC), and the Energy Administration. |
