Word Smith: Hub
As a partner at an investment fund, we were always looking for “dirty dogs” in the market. These dogs were shunned for either misbehavior, falling out of favor, or greatly disappointing their followers. Following September 11, 2001, oil and gas were treated as dirty dogs. But researching as to which dogs would be good additions to our kennel was a tricky matter. First we had to be sure we knew what was happening in the oil and gas markets. It was time to go back to school.
Oil & Gas Markets
David Nierenberg, my business partner, had had some success in the oil and gas markets by buying shares in oil field services companies, rather than investing in or hedging the commodities. Companies like Superior Energy, Denbury Resources, and Weatherford International were strong companies before, during and after the wild gyrations of the oil and gas pricing cycles. The trick was to get in and out at the right time of those cycles.
We hunted for the smartest traders and analysts and tried to understand what they saw in the micro-cap oil field services companies. Companies like Johnson & Rice, Tudor, Pickering & Holt, and many solo analysts had some outstanding track records, so we followed their lead on many of our investments. When it came time to track any of the commodities, we would quoted a price of “black gold” at THE HUB. Having never been to THE HUB, it was a good thing that everyone else had been to THE HUB and could agree to it’s validity.
What Is Henry Hub?
Henry Hub is a natural gas pipeline located in Erath, Louisiana. The pipeline serves as the official delivery location for oil and gas futures contracts that appear on the NYMEX (New York Mercantile Exchange). 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 intra-state and nine interstate pipelines, including the Transcontinental, Acadian and Sabine pipelines. (See the picture above for a more complete list.) [1]
How Best Do I Understanding Henry Hub?
In simplest terms, the Henry Hub pipeline is the point where pricing is derived for natural gas futures on the NYMEX. The NYMEX contract for future deliveries at Henry Hub began trading over 30 years ago. In 1990 those contracts were signed and the natural gas was deliverable up to 18 months in the future. The same process exists today: settlement prices at Henry Hub become the agreed upon benchmarks for the entire North American natural gas market and parts of the global LNG market (liquid natural gas). Therefore, Henry Hub is an important market clearing pricing which is based on the actual supply and demand of natural gas as a stand-alone commodity. [2]
Are There Hubs in Other Parts of the World?
Other natural gas markets in Europe and the Middle East, as examples, have very fragmented hub pricing points. This means that natural gas prices in those countries are often indexed to crude oil prices, which can have very different supply and demand factors affecting its price.
The Europeans are attempting to develop their own Europe-centric hub pricing points in the Netherlands and the United Kingdom, but this has proved difficult so far due to competition from national hubs. The issues with Brent crude and BREXIT have also complicated these efforts dramatically. Asian natural gas markets are even more fragmented and have no defined hub pricing point, although Singapore would like to serve this regional hub role. Consequently, all Asian natural gas prices are either indexed to crude oil or linked to Henry Hub. [3]
Henry Hub and 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 highly volatile markets and when crude oil prices are falling. Gas producers can rely on Henry Hub as a source of natural gas spot pricing to meet this need because of its large trading volume, clear pricing transparency, and high liquidity. Henry Hub prices are widely quoted by futures exchanges and other media sources, so parties to a contact can easily obtain this pricing data. [3]
And, YES. It is cool that the HUB is named after me…..just kidding. [4]
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[1] https://www.investopedia.com/terms/h/henry_hub.asp
[2] https://www.youtube.com/watch?v=XAJcrk0RmYs
[3] https://www.investopedia.com/terms/h/henry_hub.asp
[4] The “Henry” Hub is not named after me. It is so named for its location in the Henry Hamlet of Erath, which was named after the Henry High School that stood there until damaged by the flooding and storm surge from Hurricanes Rita (2005) and Ike (2008).
Henry E. Hooper 