Theory of storage - An empirical assessment of the European natural gas market

Abstract

This paper analyzes the relation between European natural gas storage facilities and price patterns at major trading points. Based on the theory of storage we derive testable hypothesis imposed by the non-arbitrage condition. Following the approach developed by [1], we use the risk adjusted basis as a proxy for inventory and test whether it is more variable during winter periods. Seasonal dummy variables are introduced to control for seasonalities in the convenience yield. The results indicate that while operators of storage facilities realize seasonal arbitrage profits the overall performance is substantially distinct from the competitive benchmark.