Integration of energy commodity markets in Europe and the USA

Abstract

This paper analyses the relationships existing between crude oil, natural gas and electricity prices in two deregulated markets: the USA and Europe. The analysis had to be performed separately on the US and the European markets, given the different level of deregulation reached in each market. In addition, the electricity and the gas markets had to be investigated at a regional level. The aim of the paper is to measure the level of integration existing within each energy commodity market using an error correction model (ECM) framework. The relationship between oil, gas and electricity is a crucial issue for risk management purposes. For instance, the wide-spread use of energy derivatives to hedge possible unexpected changes in the prices of fuel sources requires an accurate estimation of the existing correlation between these commodities.