Drivers of Natural Gas Prices in European Union
Drivers of Natural Gas Prices in European Union

Summary/Abstract: Natural gas is a key source of energy and an important industrial input in electricity generation. The three gas directives from the beginning of the 21st century liberalised the European gas market. They incentivised a switch from Oil Price Indexing to a Gas-on-Gas pricesetting mechanism, which made the deregulated market an interesting object of research. The drivers of natural gas prices in the European market are examinee. A VAR model with exogenous variable (VARX) is used to estimate the effects of chosen factors. The impulse-response function shows that in the short run, the European gas market is sensitive to imports of liquid natural gas and gas storage, whereas in the long run, it is highly dependent on coal, with air temperature and oil prices playing a negligible role. Forecast error variance decomposition results indicate the relationship between natural gas and coal prices in Europe. Cumulatively, approximately 64% of natural gas price variation is explained by variations in coal prices, gas storage and liquid natural gas imports, with coal prices being the single most important driver of natural gas prices, contributing to 35% of price variation.

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