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Stochastic seasonality in commodity prices: the case of US natural gas

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Abstract

Many commodity prices exhibit seasonal patterns. Futures prices are based on assumptions about spot prices in many commodity futures pricing models, and existing theories of commodity forward and futures prices assume deterministic seasonality. Therefore, examining the seasonal behavior of spot price is an important first step in ascertaining the characteristics of futures or forward prices. Using the US natural gas price as an example, we find that seasonality in the gas spot price appears to be non-deterministic and non-stationary. In this paper, we also explain the sources of stochastic seasonality in the spot price. After we examine the stochastic nature of the seasonality in the fundamental variables including production, consumption, natural gas underground storage, and weather, we investigate the seasonal cointegration of the spot gas price and these fundamental variables. We find evidence supporting the hypothesis that the stochastic seasonality in the spot price is determined by the stochastic seasonality in the fundamental variables.

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Notes

  1. See Seasonality and storage in natural gas: Resource Guide, CME group.

  2. Roberts and Fackler (1999) had a similar formulation of seasonality.

  3. They studied seasonality behavior in natural gas prices and several other commodities.

  4. Milonas (1991) studied seasonality in agricultural commodity markets and found that there were monthly, annual, and half-monthly effects. The explanation of those effects hinged on the information flow during the calendar periods.

  5. It needs to be pointed out that this is only a version of the model assumed by Canova and Hansen (1995), but not followed by Dickey, Hasza and Fuller (1984) or HEGY (1990), as pointed out by a referee.

  6. Despite the popularity in stochastic seasonality study in the 1990s, the literature was generally quiet in more recent years even though there have been some theoretical developments by Robert Taylor and his coauthors (Smith et al 2009, Del Barrio Castro et al. (2018, 2019), Chambers 2014). This study, while focusing on the natural gas market, hopefully could serve as an example of renewed interest in stochastic seasonality in applied studies.

  7. For more details on the HEGY test for monthyly data, see Beauliew and Miron (1993)

  8. For a monthly time series, the seasonal frequencies π/6, π/3, π/2, 2π/3, 5π/6 and π correspond to 1, 2, 3, 4, 5 and 6 cycles per year.

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Acknowledgements

Zhu would like to acknowledge the financial support provided by Metzger Foundation at the University of Central Oklahoma (No grant number). Chiou-Wei is grateful for the sponsorship from the Ministry of Science and Technology in Taiwan

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Authors and Affiliations

  1. National Kaohsiung University of Science and Technology, Kaohsiung, Taiwan

    Sheng-Hung Chen & Song-Zan Chiou-Wei

  2. Department of Economics, University of Central Oklahoma, Edmond, OK, USA

    Zhen Zhu

  3. C.H. Guernsey and Company, Oklahoma City, OK, 73112, USA

    Zhen Zhu

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  1. Sheng-Hung Chen
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  2. Song-Zan Chiou-Wei
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  3. Zhen Zhu
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Correspondence to Zhen Zhu.

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We would like to thank an anonymous reviewer for many helpful comments and suggestions. However, all remaining errors are ours.

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Chen, SH., Chiou-Wei, SZ. & Zhu, Z. Stochastic seasonality in commodity prices: the case of US natural gas. Empir Econ 62, 2263–2284 (2022). https://doi.org/10.1007/s00181-021-02094-4

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