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Optimization techniques applied to the trading of natural gas from a restricted storage facility Fowler, Ellen Frances
Abstract
We apply operations research techniques to the trading of natural gas from a restricted storage facility. In particular, we consider a gas trading firm that has entered into a one-year contract for gas storage whose terms restrict the balance held at any time and the quantities withdrawn and injected each day. Based on price forecasts assumed to be accurate, mathematical models identify optimal trading plans each day with the objective of maximizing net trading proceeds for the year. We conduct a two-part numerical study. First, we contrast the financial performance of a year of trades prescribed by the optimization model to the outcome according to a "naive" strategy, which represents the strategy of a hypothetical trader unaided by such a model. Comparisons are made using perfect price information, to isolate the value of optimization, and using forecasted prices, in order to make a more practical evaluation. Second, we compare the financial outcomes of our optimal trading decisions when hedging is required and when it is not, in order to gain insight into the opportunity cost of hedging. As expected, optimization models lead to better financial performance than naive strategies in all instances when perfect price information is in place. When prices are forecasted and trading decisions are therefore hampered by forecast inaccuracy, the optimization model outperforms the naive strategy on average although not in every instance. The second component of our analysis suggests that a hedging policy, while eliminating price risk, has a dramatic opportunity cost.
Item Metadata
| Title |
Optimization techniques applied to the trading of natural gas from a restricted storage facility
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| Creator | |
| Publisher |
University of British Columbia
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| Date Issued |
2002
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| Description |
We apply operations research techniques to the trading of natural gas from a restricted storage
facility. In particular, we consider a gas trading firm that has entered into a one-year contract for
gas storage whose terms restrict the balance held at any time and the quantities withdrawn and
injected each day. Based on price forecasts assumed to be accurate, mathematical models
identify optimal trading plans each day with the objective of maximizing net trading proceeds for
the year.
We conduct a two-part numerical study. First, we contrast the financial performance of a year of
trades prescribed by the optimization model to the outcome according to a "naive" strategy,
which represents the strategy of a hypothetical trader unaided by such a model. Comparisons are
made using perfect price information, to isolate the value of optimization, and using forecasted
prices, in order to make a more practical evaluation. Second, we compare the financial outcomes
of our optimal trading decisions when hedging is required and when it is not, in order to gain
insight into the opportunity cost of hedging.
As expected, optimization models lead to better financial performance than naive strategies in all
instances when perfect price information is in place. When prices are forecasted and trading
decisions are therefore hampered by forecast inaccuracy, the optimization model outperforms the
naive strategy on average although not in every instance. The second component of our analysis
suggests that a hedging policy, while eliminating price risk, has a dramatic opportunity cost.
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| Extent |
20375198 bytes
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| Genre | |
| Type | |
| File Format |
application/pdf
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| Language |
eng
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| Date Available |
2009-08-20
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| Provider |
Vancouver : University of British Columbia Library
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| Rights |
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
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| DOI |
10.14288/1.0090409
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| URI | |
| Degree | |
| Program | |
| Affiliation | |
| Degree Grantor |
University of British Columbia
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| Graduation Date |
2002-11
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| Campus | |
| Scholarly Level |
Graduate
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| Aggregated Source Repository |
DSpace
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Rights
For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.