DEFINITION of 'Basis Differential'
The difference between the Henry Hub spot price and the corresponding cash spot price for natural gas in a specified location. The Henry Hub pipeline, located in Erath, Louisiana, serves as the official delivery location for New York Mercantile Exchange (NYMEX) futures contracts. The settlement prices at the Henry Hub are utilized as benchmarks for the natural gas market in North America. When trading natural gas, the quoted price is the difference between the Henry Hub price and a specific location's price – called the basis price. A basis position is one that has exposure to two different locations: the Henry Hub and separate location's price. An actual position, on the other hand, also called the "all in price," refers to exposure to the price of gas at one location only.
BREAKING DOWN 'Basis Differential'
A hub is where two or more pipelines connect. The Henry Hub is the most important natural gas hub in North America. The price differences between the Henry Hub and at different locations are often dependent on factors such as weather, location, natural gas pipeline capacity and product quality. The U.S. gas inventories report, issued by the Energy Information Administration, is released every Thursday at 3:30 p.m. EST, and is used to gauge current supply and demand from the previous week. This report often has an immediate impact on the markets.