Are Oil and Natural Gas Going Separate Ways in the UK? Cointegration Tests with Structural Shifts

Previous analyses show that British spot market prices for gas follow the same pattern as the global oil price, i.e., we have an integrated market for energy. In recent years there are several developments in the British gas market that may call for a different price relationship. The spot market for gas has become more liquid, and an increasing fraction of gas is used for electricity generation - thus competing against coal and nuclear power. Moreover, there is an increasing LNG import, and there may have been a change in the perception of relative scarcity of oil and natural gas as well as the effectiveness of the OPEC cartel. Analysing more recent data and applying newer analytical tools that allow for endogenous structural shifts, we test whether oil and gas prices in the UK still are cointegrated. We find structural shifts in 2006 and 2007, and after the second structural shift, the evidence for oil and gas markets being cointegrated are much weaker. Specifically the stochastic trend in Brent oil seems less predominant in the movement of NBP gas price