Best Friends? – Natural Gas and Electricity Prices – An Update

By David White

In a post from January 2012, the declining correlation between the price of natural gas and the price of electricity was explored (click here).  At that time, the correlation between the two was declining as a result of the greater recovery in electricity prices relative to those of natural gas.  The graphs from that post are presented below.

The graph on the left shows monthly average electricity and natural gas prices spanning January 1, 2001 through November 2011.  The graph on the right shows the correlation between the two.  This correlation peaked at 97.2% during May 2010, then declined to 45.4% during November 2011.

Since this post, both electricity prices and natural gas prices have generally moved upwards.  While they both have recovered, the difference between them has increased.  In other words,   Electricity prices have increased more than natural gas prices.  Plotted below is the continuation of electricity and natural gas prices through September 2012, displaying this recent rise in prices.

Despite the increased gap between electricity and natural gas prices, the correlation between them has increased significantly since the last posting.  This correlation is plotted below.

On the graph, the blue line represents the data presented in the January 2012 post, and the red line is the newly acquired data.  Since the last posting, the correlation between the prices peaked at 79.9% in April 2012 and, as of September 2012, is 71.9%.  This is a significant increase from the correlation value of 45.4% that was observed in November 2011.  Through last November, the correlation had an 11-year historical average of roughly 71% and is represented by the orange line on the graph.  While the correlation of electricity and natural gas prices has fluctuated significantly over the years and this pattern is sure to continue in the future, at the moment the correlation between electricity and natural gas prices is regressing to the historical mean.

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