Usually, the producers of natural gas aren’t in the same physical region as consumers. For example, the Marcellus Shale gas producing region is far away from urban centers like New York and Washington DC, which consume natural gas for both electricity and heating homes. This results in regional differences in physical natural gas markets. An abundance of producers makes for cheaper physical natural gas in producing regions (Appalachia) than in gas hungry consumer regions (New York).

To get physical natural gas from producers to consumers, we can use transport pipelines, AKA our teleportation machine, to move natural gas molecules from Appalachia to New York. More specifically, we can buy the right to use a section of pipe. Furthermore, the physical molecules we put in the pipe aren’t necessarily the same molecules we get out of the pipe (take that teletransport paradox!).

You and I are going to start a nice business buying gas from companies busy punching holes in the ground in the Appalachia mountains, putting it in our fancy teleportation transporter, and then selling it at a premium to cold/electricity hungry urbanites in New York. Unfortunately, we don’t own the transporter, merely the right to use it. The financial savvy owners of the transporter charge us for the option to use their transporter. The price of this option is very close to the markup we’d pick up selling Appalachia gas in New York. This may be unprofitable in some situations so we don’t always end up using the teleportation machine.

So when do we use the magic transport? Sometimes the spread between two regions prices might dislocate enough that it becomes profitable. For example, during cold NYC winter days, gas demand spikes because all the urbanites are heating their homes. Local supply in the region is unable to meet the increased demand and existing transport from other regions is fixed. This causes prices to temporarily dislocate, usually caused by cold weather abnormalities in the winter. In these situations, we’ll choose to turn on our magic teleportation machine and instantly lock in the dislocated spread.

In addition to our teleportation machine, we also have a time machine, AKA storage, which allows us to take advantage of temporal dislocations. Natural gas demand (and subsequently prices) is higher in the winter months than the summer months. This dislocation is caused by a fundamental supply/demand imbalance. During winter months, demand significantly outpaces supply whereas the converse is true during summer months. To take advantage of this, we should squirrel away reserves during summer months in anticipation of winter months. We can buy cheap gas in the summer, send it to the future via time machine, and then sell the gas at a higher price later in the winter. For our purposes, a large storage facility such as a underground salt cavern or a depleted gas reserve, easily doubles as a poor man’s time machine.

It’s worth noting here that all the gas companies are doing the same thing. We need to keep an eye on the aggregate amount of storage capacity available. Once all the storage is filled up in the summer, there’s nowhere to store our excess gas and we might as well start burning it. Similarly, during a long winter, as our storage gets close to empty, any leftover gas becomes increasingly valuable. Prices become increasingly volatile as we approach both the top and bottom of our tank.