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.

To continue reading...

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: