What Is Henry Hub?
Let me explain what Henry Hub is directly to you. It's a natural gas pipeline in Erath, Louisiana, that functions as the official delivery spot for futures contracts on the New York Mercantile Exchange, or NYMEX. Owned by Sabine Pipe Line LLC, this hub links to many key gas markets across the United States. Specifically, it connects to four intrastate and nine interstate pipelines, such as the Transcontinental, Acadian, and Sabine pipelines.
Understanding Henry Hub
You need to understand that the Henry Hub pipeline sets the pricing for natural gas futures on the NYMEX. The contract for deliveries here started trading in 1990 and covers up to 18 months ahead. Settlement prices at Henry Hub act as benchmarks for the whole North American natural gas market and even parts of the global liquid natural gas, or LNG, market.
Importance of Hub Pricing
Henry Hub represents a vital market clearing pricing concept because it's grounded in the actual supply and demand of natural gas as its own commodity. In contrast, other markets like Europe feature fragmented hub pricing points, where natural gas prices are frequently indexed to crude oil, which follows different supply and demand dynamics. There are efforts to establish European hub pricing in places like the Netherlands and the UK, but these have faced challenges from competing national hubs. Asian natural gas markets are even more disjointed, lacking a defined hub pricing point, though Singapore aims to fill that role regionally. As a result, all Asian natural gas prices are either tied to crude oil or linked to Henry Hub.
Henry Hub and Liquid Natural Gas
You should know that Henry Hub also plays a role in delivery contracts for LNG worldwide, even though it's a spot price specific to the North American gas market. Some global gas producers, such as those in Qatar and Australia, prefer basing their natural gas delivery pricing on spot prices instead of oil indexing, particularly when crude oil prices drop. They turn to Henry Hub for natural gas spot pricing because of its substantial trading volume, clear pricing transparency, and high liquidity. These prices are widely reported by futures exchanges and media, making it straightforward for contract parties to access this data.
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