The effects of weather and storage shocks on natural gas price in the UK

Abstract

In this thesis we investigate the relationship between temperature deviations, storage level, and the price of natural gas in the United Kingdom. By applying these models we expect to obtain a better understanding of the relationship between these factors, and be able to check the statistical relevance of our research problem. Increased comprehension about the relationship between weather, storage, and natural gas can assist market participants’ decision-making. The analysis is based on daily data observations of 5 years from 2010 up to 2015. We created the three main variables, natural gas returns, weather shock, and storage level deviation. Other variables such as Treasury bills, Brent oil, and S&P 500 are gathered and reported as the daily change to reflect the natural gas returns. We implemented a GARCH-model to estimate the volatility of the natural gas futures price. We then creates a VAR model to illustrate the tridimensional relationship between the main variables, enabling the use of IRF to simulate shocks and estimate the respond to changes in the economic environment. The VAR model are unable to provide significant evidence of an integrated relationship, whereas the IRF model found results implying that weather and storage shock can affect natural gas returns, but the response may not materialize, rendering the results ambiguous.