Is oil-gas price decoupling happening in China? A multi-scale quantile-on-quantile approach

Abstract China's natural gas market is not only growing rapidly but is also in the process of liberalization, indicating the potential of oil-gas price decoupling. In this situation, this study re-examines whether oil-gas price decoupling is happening in China, in order to analyze the achievements of market reform. First, a multi-scale decomposition approach is used to find oil-gas price patterns in the time-frequency domain. Then, a quantile-on-quantile analysis is used to acquire the entire dependence structure between oil and gas prices. The findings indicate that the association between oil and gas prices increases over scales but varies for quantiles. Specifically, clear evidence is provided that China's liquefied natural gas (LNG) price is independent of the oil prices selected for this study in the short term, whereas no additional evidence exists that proves oil and gas prices have already been decoupled. This finding indicates that the oil-indexation pricing mechanism still remains dominant. Based on the empirical results, the authors suggest that the establishment of trading hubs, the removal of restrictive clauses in contracts, and the diversification of pricing mechanisms should be simultaneously promoted in China.