What is Henry Hub?
Henry Hub is a natural gas pipeline and distribution hub located in Erath, Louisiana. Sabine Pope Line LLC owns Henry Hub, its parent company being EnLink Midstream Partners, LP. The hub serves an important role in natural gas pricing, leading its name to be used as a price point in determining natural gas futures to be traded on the New York Mercantile Exchange (NYMEX).
The prices are denoted in USD per million and British thermal units. They are often used as a reference to set prices of natural gas across North America. The Henry Hub distribution location comprises nine interstate pipelines. The three significant channels included in the pipeline network are the Transcontinental Pipeline, Sabine Pipeline, and the Acadian Pipeline.
Transcontinental, Sabine, and the Acadian Pipelines
Henry Hub is a full-service system offering various transport, delivery, and reception services for natural gas from across the United States. It is one of the most important pipeline systems/connections in the U.S. and helps transport billions of cubic feet of natural gas annually. The Sabine Pipeline is a bidirectional pipeline that transports natural gas from Port Arthur, Texas, to the Henry Hub. It is an interstate mainland pipeline that helps build the exceedingly integrated transportation grid.
The Transcontinental Pipeline carries natural gas from the coast of Texas, Louisiana, Alabama, and Mississippi across the United States to supply New Jersey and New York City. The Acadian Pipeline is a critical connection between onshore developments, offshore pipelines, and Gulf of Mexico production. It is located on the coast of Louisiana and across the state, with 1,326 miles of pipeline.
Henry Hub also connects several storage facilities to the primary transportation grid. They consist of salt-dome caverns, which allow for efficient cycles of the import and export of natural gas through the storage facilities each year. The unique situation of Henry Hub within the vastly connected U.S. gas transport systems, easily accessible international import and export opportunities, and other amenities such as the storage facilities give the hub a novel advantage over the rest of North America and the world. Hence, it is so well known around the world in natural gas markets.
Pricing Point and the New York Mercantile Exchange (NYMEX)
Henry Hub is known as a very reliable pricing hub for North American natural gas and a pricing reference used across the world. Because of the high volume of gas flowing through the center, it helps create an accurate price based on the actual supply and demand of natural gas at a given time.
The European and Asian natural gas markets lack a central pricing strategy because their natural gas pricing hubs are quite fragmented in comparison. It forces natural gas prices to be indexed to crude oil, which can be subject to vastly different supply and demand levels than natural gas. The term indexed refers to a government or organization’s technique to connect the prices/values of a commodity or asset to another similar one. In some cases, the prices are indexed to Henry Hub to provide more consistent and accurate pricing.
The Henry Hub natural gas pipeline in Erath is the site that provides future contracts for the New York Mercantile Exchange. The reasoning behind the fact stems from the sheer volume of natural gas that runs through the hub. It allows for a very trustable valuation of the supply and demand for natural gas, allowing for a much more accurate price to be estimated.
Future contracts refer to a legal agreement to buy or sell a specific commodity at a predetermined price and time. The buyer of the contract must receive and pay for the commodity when the contract expires. The vendor must also honor the sale and distribution of said commodity at the expiry date. An alternative pricing strategy taken on by some of Henry Hub’s competitors is based on the delivery of natural gas and on-spot pricing, compared to the supply and demand strategy used by Henry Hub or the indexing of oil prices.
Henry Hub is located in Erath, Texas, and is a central connection for the vastly interconnected US natural gas transportation system. It houses connections to nine interstate pipelines and four intrastate and access to storage facilities and international export and import opportunities. The hub is used as the pricing point that defines the futures for the New York Mercantile Exchange.
Tremendous value is placed on such prices because they are based directly on natural gas supply and demand. Additionally, the immense volume of natural gas passing through Henry Hub at any given time creates a reliable valuation. It removes the need for indexing natural gas prices to crude oil or the fragmented market prices found in other parts of the world.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: