liquidity

From waves of reanimated corpses feeding on unfortunate strangers trapped in a western Pennsylvania farmhouse in Night of the Living Dead to the hordes stalking the beleaguered survivors in the current smash TV hit The Walking Dead, zombies have captivated audiences. But real life zombie companies aren’t as entertaining.  The dramatic and sustained plunge in hydrocarbon prices since mid-2014 has ravaged the finances of oil and gas producers to the extent that some observers have labeled the weakest of these “zombie” companies. These cannot sustain themselves on current pretax cash flow and look to be shuffling slowly toward their ultimate demise. Today we take a walk through the living dead to uncover the zombies.

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.

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.