Take Home II: US Residential Natural Gas Price

Analysis and 2011 ForecastGroup ELars Hult

Eric JohnsonMatthew Koson

Trung LeJoon Hee LeeAygul NagaevaJenny Yaillen

The UNIVERSITY of CALIFORNIA SANTA BARBARA

Agenda• Significance of Natural Gas in the US• Data Analysis• Forecast

Schematic Geology of Natural Gas Resources

Why Natural Gas?

• Currently second largest source of energy in the US – Used in Transportation, Industrial, Residential

& Consumer and Electric Power sectors

Source: EIA, Energy in Brief

Why Natural Gas?• Currently second largest source of energy in the US

– Used in Transportation, Industrial, Residential & Consumer and Electric Power sectors

• Low foreign dependence – 87% of gas consumed in US produced domestically

• New abundant source, Shale Gas

EIA projects 30% domestic gas production growth, 16% consumption growth, leading to declining imports

Source: Richard Newell, EIA, Annual Energy Outlook 2011

US net imports of natural gas expected to decline substantially over forecast period

Source: EIA, Annual Energy Outlook 2011

Over the last decade, U.S. shale gas production has increased 14-fold and now comprises about 22 percent of total U.S. production

Source: Richard Newell, EIA, Lippman Consulting

Four-fold increase in shale gas production offsets declines in other U.S. supply, meeting consumption growth and lowering import needs

Monthly U.S. Price of Natural Gas Delivered to Residential Consumers(January 1981-February 2011)

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Series: GASSample 1981M01 2011M02Observations 362

Mean 8.438398Median 6.965000Maximum 20.77000Minimum 3.940000Std. Dev. 3.369083Skewness 1.147545Kurtosis 3.546429

Jarque-Bera 83.95419Probability 0.000000

Trace Histogram

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GAS

Correlogram of GAS

Differenced Data Series, DGAS

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DGAS

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Series: DGASSample 1981M01 2011M12Observations 361

Mean 0.016814Median 0.040000Maximum 2.580000Minimum -3.200000Std. Dev. 0.696114Skewness -0.726564Kurtosis 6.510438

Jarque-Bera 217.1228Probability 0.000000

HistogramTrace

Correlogram of DGAS

Seasonally Differenced Data Series, SDDGAS

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SDDGAS

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Series: SDDGASSample 1981M01 2011M12Observations 349

Mean -0.003639Median 0.000000Maximum 1.740000Minimum -3.080000Std. Dev. 0.504787Skewness -0.635105Kurtosis 9.192337

Jarque-Bera 581.0628Probability 0.000000

Trace Histogram

Correlogram of SDDGAS

SDDGAS regressed on C, AR(1), MA(12)

Actual, Fitted, Residual Plot

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Residual Actual Fitted

Correlogram of Residuals

Descriptive Statistics, Residuals

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Series: ResidualsSample 1982M03 2011M02Observations 348

Mean -0.001221Median 0.003814Maximum 1.585270Minimum -1.957752Std. Dev. 0.377039Skewness -0.369274Kurtosis 7.870423

Jarque-Bera 351.8638Probability 0.000000

Serial Correlation Test

Correlogram of Squared Residuals

Garch(1,1) Model

Actual, Fitted, Residual Plot

Correlogram of Residuals

Histogram of Standardized Residuals

ARCH LM Test

Forecast of SDDGAS

Trace and Forecast of SDDGAS

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SDDGAS FORECASTLOWER UPPER

Trace and Recolored Forecast of GAS

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GAS GASFGAS_LOWER GAS_UPPER

March 2011 Forecasted Value vs. Actual Value