Storing Arb

In natural gas markets, demand exhibits low price elasticity, while supply follows the market price; a phenomenon typically observed in markets for indispensable goods. A significant portion of gas consumption is due to heating and increasingly power generation, which sets a typical demand pattern: high in winter and summer ('high' seasons) and low in shoulder months ('low' seasons). Thus, the expected spot price exhibits annual or biannual periodicity, where the maxima occur in the high seasons and the minima in the low seasons. Superimposed on this seasonality are the usual fluctuations and occasional dramatic spot price movements due to extreme weather conditions or other unpredictable events. Gas storage provides a vehicle for exploiting both seasonal variations in spot price and short time-scale fluctuations in which storage can be depleted during days of extremely high prices. As will be shown below, much of the value of storage is in the associated ability to monetize short time-scale mean reversion.