Present a short summary of Henry Hub pricing mechanism and its role in natural gas pricing.

Expert Solution

Henry Hub is basically a gas pipelines which is situated in Erath, Louisiana. The pipeline serves as a official delivery location for future contracts that are traded on the NYMEX (New York Mercantile Exchange). The pricing which is determined at the hub is treated as the central pricing for the future contracts on NYMEX.

The Henry Hub pricing is based on actual demand and supply situation of natural gas, it takes natural gas as a separate commodity to determine its prices. Other markets like Europe etc. have fragmented hub pricing mechanisms under which the pricing of natural gas is often indexed with crude oil and therefore the pricing of natural gas can be absolutely different. Henry Hub pricing mechanism is used worldwide for effective pricing of natural gas, some main global gas producers like Qatar and Australia base the prices of their natural gas on the spot prices instead of linking and indexing the same with crude oil prices and therefore there is a direct impact of Henry Hub pricing on the global natural gas pricing. Hence, when global crude oil prices are falling, Henry Hub pricing act as a cushion to natural gas producers because of its large volume trading, the transparency that it offers to the producers and the high level of liquidity that is available.

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