DEFINITION of 'Henry Hub'

Henry Hub is a natural gas pipeline located in Erath, Louisiana that serves as the official delivery location for futures contracts on the NYMEX. The hub is owned by Sabine Pipe Line LLC and has access to many of the major gas markets in the United States. The hub connects to four intrastate and nine interstate pipelines, including the Transcontinental, Acadian and Sabine pipeline.

BREAKING DOWN 'Henry Hub'

The Henry Hub pipeline is the pricing point for natural gas futures on the New York Mercantile Exchange. The NYMEX contract for deliveries at Henry Hub began trading in 1990 and are deliverable 18 months in the future. The settlement prices at the Henry Hub are used as benchmarks for the entire North American natural gas market and parts of the global Liquid Natural Gas (LNG) market.

Importance of Hub Pricing

Henry Hub is an incredibly important market clearing pricing concept because it is based on actual supply and demand of natural gas as a stand-alone commodity. Other natural gas markets like Europe have fragmented hub pricing points. This means natural gas prices are still often indexed to crude oil, which can have very different supply and demand factors affecting its price. Attempts are being made to develop European wide hub pricing points in the Netherlands and the UK, but this has proved difficult so far due to competition from national hubs. Asian natural gas markets are even more fragmented and have no defined hub pricing point, although Singapore would like to serve this regional role. Consequently all Asian natural gas prices are either indexed to crude oil or linked to Henry Hub.

Henry Hub and Liquid Natural Gas (LNG)

Henry Hub is also used in delivery contracts for LNG on a global basis, despite being a spot price for natural gas that is very specific to the North American gas market. Some global gas producers like Qatar and Australia prefer to base the pricing mechanism of their natural gas deliveries on spot prices rather than indexing to the price of oil. This is especially true when crude oil prices are falling. Gas producers can rely on Henry Hub as a source of spot natural gas pricing to meet this need because of its large trading volume, clear pricing transparency and high liquidity. Henry Hub prices are widely quoted by future exchanges and other media sources, so parties to a contact can easily obtain this pricing data.

 

 

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