Price Dynamics in LNG Spot Markets: An Econometric Analysis

In the last couple of decades, numerous papers have been written on the LNG industry. Nevertheless, only a handful of academic studies has touched upon the dynamics behind the LNG spot price mechanisms. Given the fact that long-term LNG contracts are linked to oil and/or hub-based pricing, an interesting question is which determinants drive LNG spot prices and their volatility in world markets. This dissertation employs weekly time-series data to analyze these price dynamics in the largest LNG market in the world (Japan), largest LNG trading hub in Europe (U.K.), and in the world's largest LNG re-exporting hub (Spain) between 2010 and 2015.

The first part of this research examines the effects of LNG and natural gas long-term contract prices, crude oil and coal prices, charter rates, heating and cooling degree days and their deviations from their averages, and industrial production indices on LNG spot prices. The test results reveal that LNG spot prices in Japan and Spain are primarily driven by the NBP (U.K.) spot prices and the NBP spot prices are driven by the crude oil prices. These results suggest that oil and (liquefied) natural gas prices have not decoupled and oil prices continue to drive LNG spot prices in Europe in spite of improving deregulation. We do not find evidence that LNG and natural gas long-term contract prices have any role in shaping the LNG spot prices in the short run. Even though coal is seen as a substitute for the natural gas in electricity generation, we find no cointegration between LNG spot and coal prices in any market due to mainly declining coal demand.

The second part of the dissertation extends the analysis to investigate the volatility behavior of LNG prices in these major markets. The findings provide evidence that the Japan and the Spain spot price series display a mean-reverting process. While the characteristic of this process in Japan is transitory, it is persistent in Spain. These findings imply the risk-prone nature of the Spanish LNG markets. The estimation results also display that the price shocks in the Japanese and the Spanish LNG markets have symmetric effects, that is to say, they do not react any differently to the positive news than they do to the negative news. Additionally, the findings suggest that the NBP price and the charter rates emerge as the essential determinants of the LNG price volatility in the Japanese and Spanish markets. Finally, we find no evidence that the Fukushima nuclear disaster has a shock impact on the already-increasing LNG prices in Japan. We believe that these findings offer government administrators, oil and gas companies, consulting firms, and other energy industry professionals valuable insights into the features of these continuously growing markets.