Many natural resources and energy sources are commodities. According to the Webster’s New Universal Unabridged Dictionary (1996 [43]), a commodity is “any unprocessed or partially processed good, as grains, fruits, and vegetables, or precious metals.” Coal, oil, and natural gas are additional examples. For a storable commodity, the economic interpretation of storage is the amount of commodity carried over to the next period from the current period; that is, storage from the prior period plus the difference between the commodity production and consumption in the current period (Williams and Wright 1991 [45]). Professional commodity storers, hereafter referred to as merchants, trade this surplus in wholesale markets that, for basic commodities, resemble a situation of perfect competition; that is, they are characterized by many small players who behave as price takers. For example, such a setting is the natural gas market at Henry Hub, Louisiana, the delivery location of the New York Mercantile Exchange (NYMEX) natural gas futures contract.
Merchants need access to storage facilities to support their commodity trading activities. They may own such facilities themselves, or hold contracts on their capacity. In this paper, a storage asset refers to the facility where a commodity can be physically stored, or a contractual agreement that entitles its owner to usage of a portion of such a facility. These assets feature two distinctive characteristics. On the operational side, while the storage technology may take many forms (from conventional warehouses and oil tanks to underground depleted reservoirs, aquifers, and salt domes used to store natural gas), minimum/maximum inventory levels (space) and injection/withdrawal capacity limits are ubiquitous. On the financial side, commodity prices are notoriously variable and volatile (Seppi 2002 [34]), and storage assets give their managers (merchants) the real option (Trigeorgis 1996 [40]) to buy the commodity at one point in time, store it, and sell it at a later point in time to exploit price variability and volatility.