Term structure of natural gas futures contracts

Abstract

This paper considers the possibility of the persistence of quasi rents in the US natural gas industry. We compare the term structure of gas and oil futures, and test for cointegration between gas and oil prices. The results indicate that natural gas yield curves are consistently higher than those of oil, reflecting possible higher risk premiums. The results also indicate that gas prices are cointegrated with and are driven by oil prices. This is consistent with the notion of oil price serving as market indicator for gas contracts with potential quasi-rents. Our findings are important in supporting the view that natural gas markets may maintain quasi-rents, despite evidence of long-term trends in improving market efficiency.