Gas storage valuation using a multifactor price process

In this paper we discuss an extension to a popular gas storage valuation method called the spot approach. Least-Squares Monte Carlo, which is the basis for the spot approach, allows for multi-factor price processes. Such price processes can capture more realistically the actual price behavior present in energy markets. In this paper we demonstrate the application of multi-factor Least-Squares Monte Carlo to gas storage valuation. We study the impact of using multi-factor price processes on different aspects of the valuation such as convergence, average storage value and distribution of storage values in a numerical example. We find a counter example to the idea that an increase in market volatility leads to an increase in storage value. As well, we find a counter example to the idea that the natural hedging strategy of the spot approach is no hedge: a simple static financial hedge can reduce the inherent risk of the spot approach. Finally, we study the impact of model error related to the price process.