The Henry Hub and its Role in Natural Gas Pricing
Move over, solar: natural gas is having a moment. Thanks to a recent spike in global demand, the U.S. became the world’s top LNG exporter in December, just barely surpassing Qatar and Australia’s exports. In January of this year alone, the U.S. exported 7.3 million tons of LNG to global customers, mainly to consumer markets across energy-depleted Europe.
The gradual rise in LNG exports was made possible thanks to a significant investment boost in liquified natural gas infrastructure. But another part of the reason the U.S. is so aptly poised to ramp up natural gas production is because of its location: several Southern states are sitting on what many would consider the best natural gas reserve in the world.
That natural gas reserve is the home of the Henry Hub, the epicenter of natural gas markets in the U.S. If you want to stay in the know about the American natural gas market, you’ll want to have a good understanding of the Henry Hub and the role it plays in natural gas pricing and distribution.
Understanding the Henry Hub
The Henry Hub is an interconnected nexus of several major natural gas pipelines in the U.S., located in Erath, Louisiana. It connects with nine interstate and four intrastate pipelines: Acadian, Columbia Gulf Transmission, Gulf South Pipeline, Bridgeline, NGPL, Sea Robin, Southern Natural Pipeline, Texas Gas Transmission, Transcontinental Pipeline, Trunkline Pipeline, Jefferson Island, and Sabine. Texas alone boasts intrastate and interstate pipelines that span over 45,000 miles and 13,000 miles, respectively.
But besides being a source of natural gas delivery, the Henry Hub plays an important role in the financial markets, too. Since 1990, the hub has been the physical delivery point for the world’s most-traded natural gas futures contracts on the New York Mercantile Exchange. The Henry Hub offers natural gas shippers and marketers easy access to pipelines serving markets across the entire United States — and given its location and interconnectedness to U.S. markets, it serves as a reliable indicator of natural gas supply and demand.
As a result, spot and future natural gas prices set at Henry Hub are denominated in USD per millions of British thermal units and are the primary price set for the North American natural gas market.
Though the Henry Hub has been the cornerstone of the U.S. natural gas market for decades, we can expect to see the name appear more frequently as the U.S. continues churning out higher production levels. Natural gas was the largest fuel source for U.S. net generation of electricity, accounting for approximately 1.617 trillion kilowatt hours (kWh) generated in 2020. And as LNG exports to global consumption markets reach their peaks, the U.S. will have to continue its investment in natural gas infrastructure — or risk giving up its first-place spot as the world’s largest exporter.
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