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Henry The Hub I Am I Am – Understanding Henry Hub Part II – Futures

Henry Hub is the center of the natural gas spot-trading universe with virtually every btu being sold at a price linked in some way to this market center. Henry Hub is also the delivery point for the CME/NYMEX natural gas commodity futures contract that is now the third largest in the world. In the past 5 years the shale gas phenomena has revolutionized North American gas supplies and changed the shape of the traditional south to north producer to consumer delivery pattern. More changes are on the way. Today we continue our blog series by asking whether Henry Hub still holds its own as the CME delivery point.

Before we get going lets quickly recap Part I (see a copy here) in which we recounted how Henry Hub was chosen as the delivery point for the CME/NYMEX natural gas futures contract shortly after deregulation of the physical gas market encouraged growth in spot trading. We noted that Henry is not actually a hub, but does owe a lot of its success to connections with many different interstate pipelines.

In March this year (2012) CenterPoint Energy filed a request with the Federal Energy Regulatory Authority (FERC) to establish a natural gas trading hub at Perryville, LA. CenterPoint also wishes to list the trading point on the Intercontinental Exchange (ICE), suggesting a possible interest in establishing an ICE natural gas futures contract to rival Henry Hub. We are going to examine that possibility in this blog, starting with a review of what makes a physical trading location suitable for a futures contract.

Futures markets are a specialized form of insurance that allow market participants to manage their exposure to price risk. In their present form – organized exchanges – futures markets have been around for 160 years starting with the Chicago Board of Trade in 1848. Futures exchanges offer specific contracts for trading – in our case the Chicago Mercantile Exchange (CME) trades Henry Hub Natural Gas Futures Contracts. The Natural Gas Commodity Contract for Delivery at Henry Hub is listed by the CME for future delivery periods 108 months into the future. The use and operation of futures markets for energy trading is a topic for another blog series. Here we are going to concentrate on the criteria that make a futures contract successful. That will help us to understand why Henry Hub became so successful as the delivery point for the CME natural gas futures contract and whether recent market changes may alter that perspective in the future.

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