Price Discovery in the Natural Gas Markets of the United States and Canada

The dynamics of the U.S. and Canada natural gas spot markets are evolving throughderegulation policies and technological advances. Economic theory suggests that thesemarkets will be integrated. The key question is the extent of integration among themarkets. This thesis characterizes the degree of dynamic integration among 11 majornatural gas markets, six from the U.S. and five from Canada, and determines eachindividual markets’ role in price discovery. This is the first study to include numerousCanadian markets in a North American natural gas market study.Causal flows modeling using directed acyclic graphs in conjunction with timeseries analysis are used to explain the relationships among the markets. Daily gas pricedata from 1994 to 2009 are used. The 11 natural gas market prices are tied together withnine long-run co-integrating relationships. All markets are included in the co-integrationspace, providing evidence the markets are integrated. Results show the degree ofintegration varies by region. Further results indicate no clear price leader exists amongthe 11 markets. Dawn market is exogenous in contemporaneous time, while Sumasmarket is an information sink. Henry Hub plays a significant role in the price discovery of markets in the U.S. Midwest and Northeast, but little to markets in the west. Theuncertainty of a markets’ price depends primarily on markets located in nearby regions.Policy makers may use information on market integration for important policymatters in efforts of attaining efficiency. Gas traders benefit from knowing the pricediscovery relationships.