Journal of Energy Markets

Valuation of a natural gas storage facility

Mats Kjaer, Ehud I. Ronn


We investigate the valuation of a natural gas storage facility, where trading is permitted on both futures and spot markets simultaneously. The risk-neutral futures curve dynamics is specified directly by a Heath–Jarrow–Morton model, whereas the intramonth log-spot price is given by an Ornstein–Uhlenbeck process reverting toward the log price of the most recently settled futures contract. We propose a numerical algorithm based on dynamic programming to value the storage within this market framework. The maximum storage value is realized by a pure spot market strategy that utilizes a swing-option model to maximize the intramonth value of storage injection/extraction optionality. However, numerical examples demonstrate that it is often possible to come close to this value by following a strategy involving a large proportion of injections/extractions from futures contracts. Benefits of using futures contracts include the possibility of hedging storage operations, at least partially, with the relatively liquid NewYork Mercantile Exchange natural gas futures contracts.

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