There are indications that Henry Hub, the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX) and the OTC swaps traded on Intercontinental Exchange (ICE), is being superseded by a new trading point – the Dominion South hub, a key supply point in the Marcellus shale in southwest Pennsylvania.
Reuters reported last week that, according to Intercontinental Exchange data, only about 240,000 million British thermal units (mmBtu) per day of natural gas have traded in the day-ahead Henry Hub market this year, down 70 percent from an average of more than 825,000 five years ago. Compare that to nearly 400,000 mmBtu per day so far this year, up sharply from about 290,000 in 2009 and the trend is clear.
The shift is clearly caused by the shale bonanza happening currently in the U.S. Five years ago, the Marcellus produced barely 2 billion cubic feet of gas per day; now it pumps 16 Bcfd, a fifth of America’s gas.
But not all comes down to the abundant supply of shale gas. The U.S. is changing form a country where the price of gas could be reliably measured in one place only. As Reuters points out, a decade ago, the Gulf of Mexico pumped about 20 percent of all US natural gas, much of which flowed through the Henry Hub. Now it produces just 4 percent of the nation’s total. The rest of the gas flows through the multitude of pipelines criss-crossing the country. But even with these pipelines, the industry is still struggling to build the infrastructure quickly enough to even out growing price discrepancies in regions like the Northeast. In view of these problems pricing all US gas at a single hub no longer makes sense.
“Physically, we are buying a lot more supply indexed to the Marcellus pricing points than we did historically,” said Kate Trischitta, director of trading at ConEdison Energy, a unit of energy holding company Consolidated Edison Inc.
What’s more, the abundance of shale gas has pushed the gas prices in the Northeast lower than those in the Gulf Coast. Next-day gas at Dominion South went from 21 cents per mmBtu over Henry Hub during the summer of 2009 to 30 cents under in the summer of 2013. This summer, Dominion South, one of the most-watched price points in the East, was at a discount of $1.50, five times the year-ago discount. Next-day Dominion South, which hit a 13-year low of $1.72 per mmBtu last week, averaged $2.66 this summer, the lowest since at least 2001, according to Reuters data. Henry Hub spot averaged $4.15.
Some analysts believe that with more pipelines the discrepancies in the prices of gas will even out. Others are not so sure: “The cost is steep to build new pipelines,” Citigroup analyst Anthony Yuen said in a report. “Not all of the pipeline takeaway capacity proposed would be fully subscribed; some may be delayed or cancelled.”
Analysts agree that Henry Hub will remain a benchmark for US gas futures, at least in the US Gulf and West and in international markets. And with the global acceptance of NYMEX prices, it is likely to keep setting rates for US liquefied natural gas (LNG) when the country starts exporting the fuel in a few years. “Henry could still be king … but (gas pricing) is going to be based on location, more than anything else,” said Aaron Calder, analyst at Gelber & Associates in Houston.
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