Skip to content
All library documents

Gas Storage Optimization and Repositioning Across Forward Months

Article Quant Q&A · Author: user138668
Read the original

Summary

The document considers how to optimize a gas storage schedule using a forward curve, subject to facility volume and injection and withdrawal limits. The initial intuition is to buy gas for cheaper months and sell for more expensive months, with storage capacity and flow constraints limiting the schedule. It then asks whether positions should be changed when prices move but the relative ordering of months stays the same.

The response says that, assuming no variable storage cost, unchanged relative rankings offer no gain from switching contracts. A change in which month is cheapest can make repositioning worthwhile: the example compares a June purchase with a later, cheaper July contract and weighs the loss on closing the June position against the savings from buying July. This is an illustrative explanation rather than a full optimization method. It omits factors such as storage costs, operational constraints beyond capacity, contract details, and uncertainty about future prices.

Key ideas

  • A storage schedule uses forward prices alongside capacity and injection and withdrawal limits.
  • If the cheapest month remains the same, the response sees no benefit in changing the forward position under its assumptions.
  • A new cheapest month may justify closing an earlier contract and buying in the newly cheaper month.
  • The example compares the loss on the old position with the savings from the replacement purchase.
  • The discussion assumes no variable storage costs and does not provide a complete optimization model.

Tags

CommoditiesFutures
Full text
# optimize gas storage schedule based on forward prices


# optimize gas storage schedule based on forward prices












I am solving some interviewing questions regarding gas storage optimization. I am given a gas storage facility with volume, rate of injection and withdrawal, as well as a current forward curve of gas price for the next 12 months. Obviously I should buy forward contracts for the months where prices are lowest, to max out my capacities, and sell forward contracts for the months where prices are highest. This is easy. Then the question becomes: the next day, the forward curve moved, but the basic ordering is unchanged (i.e., the cheap months are still cheap, etc..) , how do I adjust my positions of the forward contracts (long and short) in order to optimize my profit? Since I already maxed out all my capacities, any adjustments cannot change my gas flow. By no-arbitrage, I cannot generate profit by trading these contracts. Therefore I think there is no way to make changes to my contract positions to make more profit.

Am I missing something here? The question sounds like there is some adjustment to be made, otherwise it becomes a trivial question.

## Answer by Ami44 (score 3, accepted)

https://quant.stackexchange.com/a/30163

If we assume that we have no variable storage cost, than the optimal strategy in the beginning seems to be to buy as much as possible in forward contracts for the month with the cheapest forward price. Assuming you can buy enough to get through the year you'll just sell what you have until you start the cycle again next year. The next day the forward prices might have changed. If the month with previously lowest prices is still the cheapest month you can win nothing by selling or buying contracts. But imagine a situation where maybe the month next to the former cheapest month becomes the month with the lowest price. Than it would be beneficial to sell all the forward buying contracts and buy them new for the current cheapest month. Example: At the beginning you buy a forward contract for 100 units of gas in june. And you sell them over the course of the following year. The forward price for june is 10 USD per unit and the prices for all other months are higher than that. Now assume the june price drops to 9 USD but the july price drops even lower to 8 USD. Selling all your june contracts causes you a loss of 100*1 USD but by buying the july contracts you save 100*2 USD because you buy 2 USD per unit cheaper than before.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.