Henry Hub is the leading benchmark for U.S. natural gas futures. The story behind its rise to prominence sheds light on the relevance of transparency and liquidity in futures trading.
In the following article, we provide investors with a high-level overview of the Henry Hub Gas Futures, focusing on what makes this benchmark, and region, so vital to the commodity market.
Henry Hub: An Introduction
Located in Erath, Louisiana, Henry Hub is the delivery point for U.S. natural gas futures. As CME Group describes, the “hub” itself “is a nexus of several interconnections with interstate and intrastate pipelines and related infrastructure.” This makes Henry Hub a central point of contract for natural gas shippers and marketers seeking access to the U.S. regions of the Midwest, Northeast, Southeast and Gulf Coast. It is owned by the Sabine Pipe Line LLC, which has access to many major natural gas markets across the United States.
Henry Hub first emerged as the center of U.S. natural gas expansion in the late 1980s and early 1990s, which was a period of rapid expansion and competition in the U.S. energy market. Around this time, deregulation of natural gas wellhead prices had transformed the natural gas industry, allowing prices to be determined based on supply and demand and other market dynamics. Natural gas spot transactions also moved to hubs instead of wellheads, which aided in the development of various market segments, such as local distribution companies (LDCs).
It was also around this time that spot trading of natural gas began to grow, eventually paving the way for Henry Hub Natural Gas Futures in April 1990. NYMEX played a crucial role in this development by introducing a risk management and price discovery mechanism to the futures contracts. Essentially, NYMEX designed a product that would mirror the underlying physical price of natural gas futures. In other words, holding a position in the Henry Hub contract until expiration actually translates into making a delivery of the actual natural gas stored in Erath, Louisiana.
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CME Group describes Henry Hub as the “first standardized natural gas futures contract,” where it not only helped expand natural gas trading domestically, but introduced a reliable price discovery mechanism across time. The futures contract itself is listed on a monthly basis stretching for the next 12 years, offering unrivaled transparency for future prices.
The pricing mechanism employed by Henry Hub has become the preference for the entire North American natural gas market. Even natural gas locations outside of Erath, Louisiana, are based at a differential to Henry Hub, which allows them to factor in regional market conditions and transportation costs.
As a result, Henry Hub futures are the most widely traded gas futures contracts in the world. In terms of volume, the contract is the world’s third-largest physical commodity futures market. These factors give Henry Hub unrivaled liquidity and risk management opportunity.
The contracts themselves are traded electronically on CME Globex and are based on delivery in Louisiana. The Henry Hub options markets include American, calendar spread, European and daily. CME offers several options for trading Henry Hub futures, including physical futures, last-day financial futures, penultimate financial futures and last-day financial futures.
Trading of Henry Hub futures is expanding rapidly. As The Wall Street Journal reports, volumes of natural gas futures traded outside of usual U.S. trading hours surged 31% in the first half of 2017. In fact, volumes outside of U.S. trading hours have been increasing steadily since 2015, a sign that global traders are increasingly accessing the U.S. benchmark. CME believes Henry Hub could emerge as the global price setter for natural gas.
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The Bottom Line
Henry Hub’s rise to prominence is taking on a global flavor as more traders seek access to the U.S. benchmark. This is a major development for a market that has been largely dominated by regional price setters. For commodity traders, Henry Hub offers a reliable pricing mechanism for accessing natural gas futures.
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