Roll With Me Henry - LNG Exports Driving Physical Gas Flows, Constraints at Henry Hub, Part 2

Natural gas flows and market dynamics are shifting at national benchmark Henry Hub. Supply receipts at Henry this year to date have doubled since the comparable period last year to nearly 450 MMcf/d, on average. That’s also a five-fold increase from the same period in 2016. In fact, current gas flows through the hub are the highest we’ve seen since 2009. The last time we saw this level of flows through the hub was when Gulf of Mexico offshore gas production volumes — much of which hit the U.S. pipeline system in southern Louisiana — were still topping 6.0 Bcf/d. That was also before the Marcellus/Utica Shale gas supply ballooned, effectively emptying out the pipeline capacity that used to flow gas north from the Gulf Coast. Now, many of those pipelines have reversed flows and the hub is showing signs of becoming a destination market for that Northeast gas and other supply targeting LNG export demand on the Gulf Coast. Today, we continue our short series looking at the changing physical flows at Henry Hub.

In Part 1 of this series, we reviewed the role that Henry Hub — located in Vermillion Parish, LA — has played in the U.S. gas market historically — as a liquid national benchmark and delivery point for futures contracts and physical trades, but one that does not see a lot of physical gas flows. In the physical market, Henry gas volumes change hands innumerable times in a single trading day but, more often than not, only on paper using a unique title transfer mechanism called Intra-Hub Transfer (IHT). Similarly, in the futures market, while the CME/NYMEX Henry Hub natural gas futures contract is grounded by the physical assets in Henry, contract settlements rarely end in physical delivery. Thus, overall, the volume of physical flows of gas through the hub has always been disproportionately much lower than traded volumes, whether in the futures or physical market. Not only that, but as Figure 1 below illustrates, until a couple of years ago, physical flows through the hub were at the bottom of a prolonged decline trend that goes back at least a decade.

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