Dynamics of the EU Natural Gas Market: lnuestigating the Impact of Supply and Demand Shocks on Natural Gas Prices

Abstract

This thesis examines the dynamics of the EU natural gas market, investigating the impact of supply and demand shocks on natural gas prices. Focusing on the EU’s dependence on Russian gas, we employ a structural vector autoregressive model based on the methodology of Kilian (2009). To estimate the effects of structural shocks on natural gas prices in the EU, we include natural gas imports from Russia, EU primary production, real economic activity, and the real price of gas as variables in our model. Our results suggest that demand shocks play a dominant role in explaining the variation in natural gas prices in the short term. Over time, supply shocks gain more explanatory power, particularly Russian supply shocks. Analysing the impulse responses, we observe that Russian supply shocks lead to increasing prices with a lag. This implies that the EU may be able to temporarily compensate for supply shortfalls in the short term, whereas the high dependence on Russian gas presents challenges in the long term.