Riders on the Storm, Part 2 - Physical Gas Flow Constraints, Volatility Arise at Henry Hub

With the rise of LNG feedgas demand in southern Louisiana, physical natural gas flows at Henry Hub have been climbing. As such, volumes moving through the U.S. benchmark pricing location are increasingly affected by swings in LNG feedgas deliveries, as well as in the gas supply flows into southern Louisiana that serve that demand. Those impacts have become particularly evident in recent months as nearby LNG export capacity utilization went from a trough this summer due to cargo cancellations, to being erratic during late summer and fall as hurricanes disrupted marine traffic and facility operations, and, in more recent days, to being at full bore at most facilities. In conjunction with brimming storage and pipeline maintenance in the area, this has meant more operational constraints and volatility in flows and pricing at the hub. Today, we continue our series on the changing dynamics in and around Henry Hub. 

This is Part 2 of our updated analysis on Henry Hub gas flows. As we said in Part 1, Henry, which is encompassed within Vermilion Parish, LA, has numerous distinctions that give it the benchmark status in the U.S. natural gas market: it’s been the center of the gas spot-trading universe for 30 years; it’s the delivery mechanism for the third-largest commodity futures trading instrument in the world — the CME/NYMEX Henry Hub natural gas futures contract; and, after decades of being the basis of domestic gas deals, spot and futures prices at the hub also now serve as the index for U.S. LNG export contracts. (For a full discussion of the origin and history of Henry Hub, see our Henry the Hub I Am I Am blog series.)

The physical infrastructure and connectivity at Henry Hub, comprising 11 pipeline interconnects and over 3 Bcf/d of receipt and delivery capacity, is one of the reasons for its long-term success as a national benchmark price location. Nevertheless, liquidity there historically has been dominated by financial trades or Intra-Hub Transfers (IHT) deals that utilize a “behind-the-scenes” accounting mechanism enabling counterparties to exchange gas there through title transfers, without any physical movement of gas. So, while the hub has over 3 Bcf/d of capacity to receive and deliver gas, physical volumes of gas flowing there had been largely range-bound between 100 MMcf/d and 400 MMcf/d for much of the past decade. That is, until recently.

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