How connected are the U.S. regional natural gas markets in the post-deregulation era? Evidence from time-varying connectedness analysis

The level of market integration is a critical indicator of resource allocation efficiency. In this paper, we evaluate the dynamic spatial integration in the U.S. natural gas market since deregulation and the relative importance of each location in the overall price discovery process. Using data from seven natural gas spot markets in the U.S, as well as one Canadian spot market located on the border between U.S. and Canada, we find that the U.S. regional natural gas market is on average well-integrated in both the short- and long-runs. The connectedness price index we constructed ranges between 55% and 85% during the sample period (1994–2016). Though the connectedness of the market has generally improved, a marked decline has occurred over the past few years, coincident with the shale gas boom. This decline may be attributed to pipeline capacity constraints in an increasingly oversupplied market and the relatively small number of market participants voluntarily reporting transaction activities to price indexes. We find that the role of each regional market in the overall price discovery process has undergone several shifts during our sample period, depending on the specific market conditions at both the national and regional level. Of the eight locations, Henry Hub and Oneok appear to be the two most active markets, both transmitting and receiving a substantial amount of information throughout most of the sample period.