The other side of the coin: Speculation in bearish natural gas markets

This paper analyses the speculative behaviour of traders in natural gas markets. We test for mild explosiveness in natural gas futures prices using the method proposed by Phillips et al. (2015a) and employ a multinomial logistic regression to determine whether changes in trader positions drive these explosive episodes. Our findings indicate that changes in short positions held by money managers increase the probability of negative explosiveness in futures prices. Our Granger causality analysis reveals that changes in positions held by money managers (pure speculators) precede changes in spot and futures prices, as well as the incentive to hold inventories during bearish market phases. This supports the notion that speculators might influence natural gas price dynamics in bearish conditions. However, our analysis does not provide evidence of a similar impact on futures prices during bullish phases. In fact, our results suggest that long positions taken by speculators reduce the probability of explosive price increases.