Henry The Hub I Am I Am 2015

As natural gas production growth in the U.S. has shifted from the Gulf Coast region to the Northeast’s   Marcellus and Utica shale, some have suggested that time may have passed by Louisiana’s Henry Hub as the national benchmark for all U.S. gas prices, and have questioned whether it can maintain its position as the third largest physical commodity futures contract in the world.   Should Henry be replaced by some pricing point in Appalachia?  Is Henry really in trouble?  In today’s blog, we continue our series looking at what makes Henry Hub tick with a closer look at the implications of changing physical and futures volumes at the hub.

The Henry Hub, LA physical interconnect at the center of North American natural gas pricing is about to go through big changes with the in-service of liquefied natural gas (LNG) export terminals as soon as the end of 2015 and growing industrial demand in the Gulf Coast region. These changes are also likely to impact the CME/NYMEX futures contract that is based on delivery at Henry.  To understand how the demand growth nearby will impact Henry Hub cash and futures markets, we must first understand what really goes on physically at Henry. In today’s blog, we dive into the workings of the physical Henry spot market.

The CME/NYMEX Henry Hub natural gas futures contract turns 25 years old this year. The contract is now the third largest physical commodity futures market in the world. The price of virtually every Btu of gas sold in North America is linked in some way to the underlying physical hub at Henry. But over the past five years shale gas has revolutionized North American supply and changed the shape of delivery patterns. These trends have altered the flow of physical gas through Henry Hub and could jeapordize the success of the futures contract. Today we look at  why Henry Hub has been so successful.

The Henry Hub in Louisiana is the best known natural gas trading location in the world. There is certainly no more liquid point in the industry. An average of 350,000 Henry Hub natural gas futures contracts trade on the CME/NYMEX each day. The Henry price is used to compute locational ‘basis’ at all other natural gas trading points in North America and thus is the reference price for tens-of-thousands of derivative instruments and other commercial contracts. But the U.S. natural gas industry is changing rapidly. Henry started out as a supply market hub but a natural gas demand renaissance in and around Louisiana is transforming it into a demand market hub. How will this impact Henry and can/will it endure as the national benchmark price? Today, we begin an in-depth series looking at Henry Hub, starting with its origins.