Since August, physical natural gas flows at Henry Hub have been at all-time highs for each respective month, and, in early October, they recorded the highest single-day flows that we’ve seen since December 2009. For decades, liquidity at the U.S. natural gas benchmark pricing location in southeastern Louisiana has been dominated by financial trades, with minimal physical exchange of gas, despite the hub boasting robust physical infrastructure and ample pipeline connectivity. That’s still the case, but physical movements of gas in the area have been on the rise due to LNG exports ramping up from the Sabine Pass and Cameron LNG facilities in southwestern Louisiana and a slew of Appalachia gas supply pipelines targeting that export demand. As more physical gas is moving through the hub, operational constraints are developing at key interconnects there. That, along with the ups and downs of LNG feedgas demand, is contributing to spot price volatility at the hub and, at times, a deeper divergence between Henry spot and futures prices. Today, we begin a short blog series on the changing gas flow dynamics in and around Henry.
The Henry Hub pricing location in Vermilion Parish, LA, has been the center of the natural gas spot-trading universe going back as far as the late 1980s, and is the delivery mechanism for the third-largest commodity futures trading instrument in the world — the CME/NYMEX Henry Hub natural gas futures contract. Long used as the basis for domestic gas deals, in recent years, it’s also become the benchmark for U.S. LNG export contracts. We detailed the formation, evolution, and rationale for the benchmark trading location, in our Henry the Hub, I Am I Am blog series. But the physical infrastructure at the hub has changed little over the decades, and, despite its “industry benchmark status” and highly liquid futures contract (red line using right axis in Figure 1), physical gas flows utilizing those assets (blue area on left axis) were not the driving force there. In fact, physical trade volumes at Henry (gold line, also on left axis) historically were driven less by physical flows and more by Intra-Hub Transfers (IHT), a “behind-the-scenes” accounting mechanism that gives counterparties the ability to exchange gas there through title transfers, without any physical movement of gas. Moreover, in the first half of the past decade, traded volumes — combined for physical flow and IHTs (these trades are indistinguishable) — dropped off as gas production volumes from both offshore Gulf of Mexico and western Louisiana’s Haynesville Shale declined (gray-shaded arrow).
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