The Value of a Storage Facility

The paper derives the value of a storage facility that is too small to affect an exogenously defined price process of a storable good with seasonal and mean-reverting components. It provides an elegant new continuous-time model of storage under simple assumptions, which could be applied, for example, to natural gas. In the case without a seasonal component, closed form solutions are obtained as functions of the underlying price. A local time analysis provides an even simpler unconditional formula, which generalizes to the full model. The value of a storage facility under a model with a seasonal and a stochastic component is represented as a time integral which is easily evaluated numerically. The analysis provides a proper treatment of the true nature of the "option to store" and insights into the value of each component. An interesting feature of the model is that all transactions (whether to buy or to sell) are triggered by a single critical price. The analysis enables us to compare the profitability of storing under alternative price process assumptions.