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Henry Hub Natural Gas Futures: Global Benchmark
21 Nov 2017
Adila Mchich
The Henry Hub futures contract is one of the most traded natural gas futures contracts in the world due to its price transparency and robust liquidity. As the delivery point for Henry Hub futures, the Henry Hub, located in Erath, Louisiana, is a nexus of several interconnections with interstate and intrastate pipelines and related infrastructure. As a result of this level of interconnection, Henry Hub offers natural gas shippers and marketers ready access to pipelines serving markets in the Midwest, Northeast, Southeast and Gulf Coast regions of the United States.
The purpose of this article is to highlight the trading characteristics of Henry Hub futures and the infrastructure relevance of the underlying delivery point, which have enabled this contract to become the benchmark or de facto price reference for the US natural gas market.
The structure of the US natural gas market has evolved over time and become in essence the most competitive, efficient, transparent, and liquid natural gas market in the world. In the late 1980s and early 1990s, the deregulation of natural gas wellhead prices revolutionized the US natural gas industry and transformed the wholesale natural gas market. Market liberalization allowed the price to be determined based on market dynamics and demand and supply interaction. Additionally, natural gas spot transactions moved from wellheads to hubs which started offering various physical services and products to different market segments including marketers, local distribution companies (LDCs). Spot trading around hubs and market centers started to flourish and the pool of market participants expanded. These changes led to a highly competitive and efficient natural gas marketing and wholesale market.
In April 1990, NYMEX played a groundbreaking role by introducing the Henry Hub Natural Gas Futures as a risk management and price discovery mechanism. The product was designed to mirror commercial practice and the underlying physical market. It allows the “monetization” of natural gas for future delivery through standardized transactions. Holding a position in this contract will result in taking or making delivery of the actual natural gas at Henry Hub unless the open position is closed before expiration. The delivery process resulting from the futures contract represents the linkage between the physical market and the financial market.
As the first standardized natural gas futures contract, Henry Hub futures became the catalyst for the growth of financial natural gas trading in the US. Unlike the physical market, the futures market offers price discovery across time reflected in the term structure or the forward curve. The futures contract is listed on a monthly basis for the next twelve years, allowing visibility of market expectations for future natural gas prices. Henry Hub is utilized as the pricing preference for essentially the entire North American natural gas market. Other US natural gas locations are basically priced at a differential to Henry Hub to account for regional market conditions, transportation costs, and available transmission capacity between locations.
The Henry Hub futures contract is the world’s most traded natural gas futures contract. The high liquidity of Henry Hub futures provides market participants with easy access to either enter or liquidate positions. As shown in Chart 1, daily volumes averaged 412,370 futures contracts during 2017 (through September). Average daily volume has significantly increased over time, reaching a record level of 487,622 contract in October 2016. Open interest also increased 26% in 2017 (through September). compared to the previous year. The depth of liquidity, which is reflected by extensive participation by market participants, has enhanced the price discovery function of the contract.
Chart 1: Henry Hub Natural Gas Futures (NG): Average Daily Volume and Open Interest
The commercial relevance of Henry Hub is the result of its strategic location and logistical infrastructure. This physical aspect is a crucial component to better understanding the role of Henry Hub futures as the pricing benchmark for the natural gas market.
Henry Hub is strategically situated in a major onshore production region and is at close proximity to an offshore production area as well. As indicated in chart 2, the monthly average natural gas production in Texas has been approximately 627,237 MMcf since January 2014. This represents 27% of US marketed production, making Texas the state with the highest natural gas production. State production levels have grown in recent years due to increased drilling activity from shale formations, in particular the Eagle Ford, Barnett, Haynesville, and Permian basin in west Texas.
Chart 2: Texas Natural Gas Marketed Production (MMcf)
As indicated in chart 3, Louisiana produced a monthly average of 154,448 (MMcf) from January 2014-July 2017. This represents 7% of US marketed production. Louisiana production comes from two geologically different regions: South and North. Most of the natural gas produced in the North is from the Haynesville shale play, while most of the natural gas produced in the South is from associated gas (oil rigs) and the offshore area.
Production in both regions decreased slightly in 2015 and 2016 as a result of low natural gas prices. Notwithstanding, production from Texas and Louisiana accounted for nearly 31% of national production.
Chart 3: Louisiana Natural Gas Marketed Production (MMcf)
In addition, the region has also relied on natural gas produced in the Federal Offshore region. Chart 4 shows that the monthly average offshore natural gas production from January 2014 to July 2017 is approximately 102,845 (MMcf).
Chart 4: Federal Offshore – Gulf of Mexico Natural Gas Marketed Production (MMcf)
In addition to the ample supply that is available and accessible, the Southwest region has one of the most developed and extensive pipeline networks in the country.
This allows natural gas to be moved from supply basins and exported to major consumption markets. This highly integrated network is served by both interstate and intrastate natural gas pipelines. In Texas, intrastate and interstate natural gas pipelines1 span over 45,000 miles and 13,000 miles respectively. Louisiana’s distribution system also plays a pivotal role in delivering natural gas to major markets via several interconnections to interstate and long haul pipelines such as the Texas Gas Transmission Company and the Trunkline Gas Company.
Henry Hub is owned and operated by Sabine Pipe Line LLC and its affiliates as a full-service header system which offers various receipt and delivery capability, hub management services, and an extensive interconnection to one of the most important US pipeline structures Sabine Pipe Line is a bidirectional mainline pipeline that stretches from Port Arthur, Texas to the Henry Hub near Erath, Louisiana. As an interstate pipeline that is certified as an open-access gas transporter, it is directly connected to four industrial consumers and one producer. Through its transportation program, Sabine provides transportation services for both the Henry Hub and Sabine’s mainline. This allows a shipper to transfer gas from one pipeline to another. In addition, the hub offers a variety of hub services such as balancing to cover short-term natural gas needs and title transfer, which involves the progression of natural gas ownership from party to party.
Henry Hub is interconnected to eight interstate pipelines and three intrastate pipelines. These pipelines are part of the highly integrated US transmission grid, which transports natural gas from production and processing areas to storage facilities and distribution centers and then onto consumption markets. A schematic of Henry Hub is included below.
Source: EnLink Midstream
The region also has an extensive offshore gas pipelines, which move natural gas from Deepwater areas to onshore gathering and processing plants. Actually, the region is currently experiencing significant developments in midstream business and pipeline infrastructure to displace the excess shale gas to new markets. The map below illustrates offshore pipelines in the Gulf of Mexico.
Henry Hub also has a direct connection to storage facilities, including Jefferson Island, Acadian, and Sorrento. These facilities are salt-dome caverns characterized by high-deliverability and high cycling rate, which allow for several withdrawal and injection cycles each year. Additionally, Henry Hub has access to other storage facilities in the region through interconnected pipelines. The region already has significant storage sites while many others are in the process of development. These facilities represent a fundamental conduit that offers flexibility in withdrawals and injections based on demand and supply dynamics to meet the needs of the Southwest region or other regions. Chart 5 exhibits the underground storage.
Chart 5: Natural Gas Underground Storage Volume (Million Cubic Feet)
From a demand perspective, the US Gulf Coast (“USGC”) is undergoing a fundamental shift and becoming a major consumption destination. The abundant natural gas and the low-price environment has transformed fuel economics and has increased the use of natural gas as a feedstock by the electricity, industrial and export sectors. According to the EIA, US electric generation capacity is expected to expand by 11.2 gigawatts (GW) in 2017 and 25.4 GW in 2018 due to high coal-to-gas switching, the retirement of coal-fired generators, and environmental regulations. Specifically, Texas is turning to more natural gas to meet its growing power generation demand and is building considerable number of natural gas-fired power plants. On the other hand, natural gas demand from the industrial sector (e.g., fertilizer, petrochemical, and steel) is noticeably expanding. Most of the significant investments and infrastructure expansion projects are situated in Texas and Louisiana.
The shale revolution has profoundly changed the market landscape and paved the way to export opportunities in order to absorb the surplus. US is now the largest natural gas producer in the world. This is due largely to the rapid drilling technological development which was prompted by the shale renaissance. These advancements have substantially enhanced the productivity and have cut costs per well. As per Chart 6, US shale production growth is expected to reach 43 Bcf/d by 2035.
Chart 6: Gas supply growth
As the first mover in the US, Cheniere’s Sabine Pass terminal in Cameron Parish in Louisiana started exporting LNG in February 2016. Several other brownfield and greenfield LNG projects are under construction and are expected to come online in the next few years. Most of these anticipated developments are located in the Gulf of Mexico, which offers a concentration of infrastructure capabilities and robust production. Additionally, the recent expansion of the Panama Canal provides an opportunity for US Gulf Coast LNG to be economically shipped to the Pacific Basin.
As of December 2016, Cheniere had exported approximately 184 Bcf. Export levels are expected to grow considerably once other terminals, which are currently under construction, come online. According to EIA estimates, these projects are expected to increase export capacity to 9.2 Bcf per day by 2021.
In order to secure financing for its capital-intensive investment in infrastructure, Cheniere entered into longterm agreements (SPAs) with global off-takers referencing a Henry Hub-linked formula. This has opened the door to other market participants to start adopting Henry Hub as a price anchor to diversity exposing their portfolio to only one price marker.
In conclusion, due to its ample natural gas supply, robust infrastructure, sound financial system, and well-developed commodity trading apparatus, the US is poised to become a major LNG player, which will make Henry Hub an even more important price reference in global gas trading.
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还木有人为作者打赏我来第一个打赏
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