When I first came to the wholesale energy industry in 2000, it was a time when exotic energy contracts were liquid and plentiful, firms were obsessed with building natural gas storage models, and forward natural gas prices blew through their all-time highs of five dollars to rise well above ten dollars per MMBtu.  My background was in financial derivatives (equity options and mortgage-backed securities), and I was close to finishing my Ph.D. at Carnegie Mellon, where I learned the intricacies of financial derivatives modeling. 

I noticed very quickly that exotic energy contracts were much different than financial derivatives.  These contracts involved multiple exercises over very long time periods on underlying spot prices possessing profitable trends.  Some contracts even required a minimum number of exercises; others had floating strike prices.  Models adapted from the financial industry (“bastardized” is more accurate) were very poor for modeling commodity prices, like natural gas prices, and some early articles on pricing various exotic energy contracts were just plain wrong!

Valuing natural gas storage contracts correctly was out of the question in 2000, but a few pioneering firms were developing Monte Carlo simulations to approximate such values.  These models were capable of operating on the PC hardware available at that time.  However, these storage models were frustrating black-boxes, and I knew I could do much better!

In early 2001, I decided to tackle the valuation of storage contracts, and I recognized that multiple modeling breakthroughs were needed to do this, breakthroughs on which the current literature is still silent.  After over five years of research and modeling, all the breakthroughs needed to correctly value storage were made, and WTM Energy Software was born.

Today, WTM offers a revolutionary turn-key model of natural gas storage contracts.  This model captures the immense optionality in storage contracts while giving values, recommended trades, recommended hedges, and VaRs.  Recent back testing results confirm this!  Visit the other areas of this web site to see more, especially the User’s Manual for running the storage model, the White Paper of the theory behind the model, and the back testing results showing the values the model could actually capture in prior years.

Meanwhile, the other storage modelers continue to sell black-box Monte Carlo simulations developed last century.  The models are frustrating to use, yield unintuitive results, and have no prospects of getting measurably better.  These current storage models, which are now nothing more than rough attempts at modern alchemy, are frustrating to storage traders.  That is why I created the WTM storage model!

Cliff Parsons
President – WTM Energy Software, LLC