Gas Storage Valuation and Hedging: A Quantification of Model Risk

Abstract

This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we propose a model that unifies the dynamics of the futures curve and spot price, and accounts for the main stylized facts of the US natural gas market such as seasonality and the presence of price spikes in the spot market. Secondly, we evaluate the associated model risk, and show not only that the valuation is strongly dependent upon the dynamics of the spot price, but more importantly that the hedging strategy commonly used in the industry leaves the storage operator with significant residual price risk.

Dynamic asymmetric optimal portfolio allocation between energy stocks and energy commodities: Evidence from clean energy and oil and gas companies

“…Domestic issues and international conflicts contribute to the volatility of energy prices (Shahbaz et al, 2017). The prices of heating November impacts the oil and gas industry, disrupting off-shore activities and refineries and causing sharp seasonal spikes in crude oil and natural gas prices (Efimova and Serletis, 2014;Hénaff et al, 2018;Nick and Thoenes, 2014). The spike in the price of natural gas in 2018 provides an informative example.…”

On conditional cuts for stochastic dual dynamic programming

“…The SDDP method with or without conditional cuts have been implemented in StOpt [55] an open source library containing tools to solve optimization problems both in continuous or discrete time. In particular, inventory / stock problems (such as cascaded reservoir management problems, e.g., [5,47,56] or gas storage, e.g., [57,58]) can be optimized using either the Dynamic Programming method or the Stochastic Dual Dynamic Programming method. The subsequent experiments were carried out using this library.…”

Editorial for Special Issue “Finance, Financial Risk Management and their Applications”

“…In addition, a comparison with low-pass filtering methods was made. The fifth paper entitled "Gas Storage Valuation and Hedging: A Quantification of Model Risk" by Hénaff et al (2018) investigates the valuation and hedging of gas storage facilities using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The authors evaluated the associated model risk, and showed that the valuation is strongly dependent on the dynamics of the spot price and the hedging strategy commonly used in the industry, leaving the storage operator with significant residual price risk.…”