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Home›Monotonic›Theory for the optimization of the capacity storage of raw materials with case studies in natural gas

Theory for the optimization of the capacity storage of raw materials with case studies in natural gas

By Richard Lyons
December 10, 2021
22
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Theory for Optimizing Raw Material Capacity Storage with Natural Gas Case Studies – Journal of Energy Markets





  • Optimizing the storage of raw materials involves developing spot price thresholds for exchanges.
  • Thresholds represent the value of modified future opportunities currently trading.
  • The injection and withdrawal thresholds vary by inventory and differ mainly in transaction costs.
  • The critical inventory levels developed in Secomandi (2010) are explained and implemented by thresholds.

We develop theoretical optimal injection and withdrawal concepts for a capacity storage of raw materials and provide case studies in natural gas. We start with the concept of spot price thresholds, which represent the expected value of future opportunities missed or created by currently injecting or withdrawing a commodity. Comparing the spot price with the spot price thresholds dictates when current trading is optimal. Under certain conditions, these thresholds monotonically decrease in the level of stocks, and therefore they relate to and extend previous work in a configuration similar to ours. This work proves the existence of two levels of critical stocks such as injecting, withdrawing or doing nothing, respectively, is optimal for current stocks below, above or between these levels, all other things being equal. We find that the current spot price against the thresholds causes both these results and can be used to calculate critical inventory levels. In addition, the difference between the two critical inventory levels is mainly due to transaction costs.

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