ELECTRIC POWER SYSTEMS ARE HEAVILY DEPENDENT ON computers and communications. The electric power industry is reputed to be the third largest user of computers and communications, behind...
Improving Competitive Position with Natural Gas Storage
when the futures price exceeds the cash price by more than cost of storage and cost of money, a holder of rights to storage could purchase, store, and deliver gas under the futures contract and again make a risk-free return. Of course, any additional costs from such transactions would need to be counted as well. Owners and operators of highly flexible storage facilities are suited to such strategic behavior, as are companies with contract rights to such facilities that allow for flexible use.
Daily spot and futures prices and the difference between them illustrate how changes in the weather and other factors influence the natural gas market (see Figure 1 on p. 35). For example, the weather in early 1994 was unusually cold, particularly around January 15, and gas demand levels rose to historically high levels in many places. As a result, spot prices rose dramatically. Futures prices rose as well, but less dramatically. Most important, the premium rose to more than 80›/MMBtu on January 19 at the peak of the cold spell. Bad weather abated somewhat after January 20th, but the premium rose to $1.12/MMBtu on February 2 when the weather was forecast to turn cold again. By February 18, as the weather returned to normal and uncertainty about availability of supplies was reduced, the premium fell to zero.
Construction and constant monitoring of a data series such as the premium enables the owner of stored gas to track changes in the value of gas in inventory over time. Followed daily, this practice supports the same type of market discipline as the daily marking to market of futures positions. It also reveals market opportunities and market conditions (see Figure 2 below). For example, the magnitude of the premium upon a return to normal weather during late 1992 and early 1993 suggests that a positive premium was often associated with having stored gas to help balance the system and to serve markets should the weather change suddenly. The value of stored gas is also revealed by the premium during the March 1993 "Storm of the Century." (But note how quickly a premium can disappear as the market responds.) Finally, the value of the premium throughout much of 1994 is consistent with the growing oversupply that caused a large reduction in cash prices during latter part of year.
Series similar to the Henry Hub series could be constructed for different market centers using the purchased-gas cost plus cost of storage and money in place of the futures price. Alternatively, if transportation costs were relatively constant or predictable between market centers, cost of storage along with cost of gas at different market centers could be used to compute a premium for alternative market centers.
Statistical analysis of the premium is also possible. For example, in January through February 1994, the unit reduction in temperature below normal values for a single day was estimated to increase the premium by $0.0185 MMBtu nationwide. Similar estimates for market centers would enable the owner of gas stored near market centers to calculate, on average, either the premium to