Price Dynamics In Energy Spot And Futures Markets: The Role Of Inventory And Weather

This paper examines the role of fundamentals in inter-temporal pricing relations in natural gas and heating oil spot and futures markets. Using non-linear error correction models with bivariate GARCH error process, it is found that fundamentals are the partial sources of variation in price changes in both markets. Extreme cold weather and inventory surprises affect the variation in basis, spot and futures price changes. Furthermore, the conditional volatility of natural gas and heating oil spot and futures markets are higher in winter and lower in summer months.