Energy markets: crucial relationship between prices 25prices has been found despite periods where they may have appeared to decouple.
A cointegration relationship between the prices of West Texas Intermediate (WTI)
crude oil and Henry Hub (HH) natural gas has been examined in [4] and [9].
Analysis of the relationship between electricity and fossil fuel prices has only
been performed at regional levels and on linked sets of data given the recent in-
troduction of spot electricity markets. Serletis and Herbert [15] used the dynamics
of North America natural gas, fuel oil and power prices from 1996 to 1997 to find
that the HH and Transco Zone 6 natural gas prices and the fuel oil price are coin-
tegrated, whereas power prices series appears to be stationary. In [8] the existence
of a medium- and long-term correlation between electricity and fuel oil in Europe
is analysed. [2] investigates the dynamic of gas, oil and electricity during an interim
period 1995–1998: deregulation of the UK gas market (1995) and the opening up of
the Interconnector (1998). Cointegration between natural gas, crude oil and electric-
ity prices is found and a leading role of crude oil is also identified. More recently,
using a multivariate time series framework, [13] interrelationships among electricity
prices from two diverse markets, Pennsylvania, New Jersey, Maryland Interconnec-
tion (PJM) and Mid-Columbia (Mid-C), and four major fuel source prices, natural
gas, crude oil, coal and uranium, in the period 2001–2008, are examined.
To the best of our knowledge the level of integration between the gas, oil and
electricity markets in the European market has not been investigated. The purpose of
this study is mainly to perform such analysis in order to verify if an integrated energy
market can be detected.
3 The data set
Time series for the daily prices of ICE Brent crude oil,^2 natural gas at the National
Balancing Point (NBP) UK^3 and European Energy Exchange (EEX) electricity^4 are
used for the period September 2001 – December2007.
Oil prices are expressed in US$/barrel per day (bd), gas in UK p/therm and elec-
tricity prices ine/Megawatt hour (MWh). We convert all prices intoe/MWh using
the conversion factors for energy content provided by the Energy Information Ad-
ministration (EIA).^5 The dynamics of the energy prices are represented into Figure 1.
Following the standard literature we perform a finer analysis of the volatility of
each price series by estimating the annualised quarterly volatilitiesσi=σi,N
√
250,
(^2) Brent blend is the reference crude oil for the North Sea and is one of the three major
benchmarks in the international oil market [7].
(^3) The NBP is the most liquid gas trading point in Europe. The NBP price is the reference
for many forward transactions and for the International Petroleum Exchange (IPE) Future
contracts [7].
(^4) EEX is one of the leading energy exchanges in central Europe [7]. For the purpose of our
analysis peak load prices have been used.
(^5) According to EIA conversion factors, 1 barrel of crude oil is equal to 1.58 MWh.