Henry Hub has long been considered the most important natural gas market due to its robust liquidity and benchmark status.
That status has continued to grow in recent years on the back of events, such as the war in Ukraine, as the subsequent curtailment of Russian natural gas pipeline flows has seen higher flows of U.S. liquefied natural gas (LNG) exported into European markets. Total U.S. exports reached on average 357 BCF per month during the second quarter of 2023, an increase of 21% compared to the same period 12-months earlier. The latest report from the U.S. Energy Information Administration (EIA) shows that U.S. LNG exports reached a record level in the first half of 2023 with an average of 0.5 BCF per day, an increase of 4% on the prior year period.1 Third quarter 2023 volumes show an increase of 0.6 BCF per day compared to the same quarter in 2022. The EIA noted that the U.S. became the world’s largest LNG exporter.
Chart 1: U.S. regains top spot as the largest LNG exporter
Henry Hub – the global gas benchmark
Traders have turned to CME Group Henry Hub Natural Gas futures and options benchmarks to manage price risk exposure to the underlying commodity. Volumes outside of U.S. trading hours have been increasing in regions such as Europe, Middle East, and Africa (EMEA), partly due to the growth of LNG exports into the region with higher flows of LNG. LNG connects the major gas markets around the world with the higher flows boosting the volumes traded out of the core U.S. hours.
As liquidity grows in regions such as Europe, Henry Hub can provide a valid benchmark that is reflective of the global dynamics in the natural gas trade. Trade in the benchmark sends price signals to European natural gas traders to support pricing in the global LNG trade. The chart below breaks the volume down further into regions to show the global reach of the U.S. benchmark. Trading volumes from Europe have been increasing in recent months, partly reflecting the supply and demand fundamentals in the region given the ongoing war in Ukraine and the decline of Russian pipeline gas flows into European markets.
Chart 2: European volumes in Henry Hub breach 20% of total volume
The latest data from CME Group shows that as much as 21% of all volumes of U.S. Natural Gas futures are traded by firms based in EMEA. Average daily volumes reached 75,000 lots in the third quarter of 2023, which represented a near doubling of the volumes seen during the third quarter of 2022. On an annualized basis, volumes looked set to reach around 78,000 lots per day, an increase of around 50% on 2022 average daily volumes.
LNG exports to Europe have led to a clear upturn in Henry Hub natural gas volumes during the European trading zone. Traders are particularly active in Henry Hub due to the deep liquidity, which reduces transaction costs, improves the speed of price discovery, and provides clear price formation.
The increase in EMEA volumes traded outside of the core U.S. hours could suggest a greater reliance on Henry Hub as the price reference for the international gas trade. The U.S. benchmark price could be traded as a reference price to capture any inter-regional arbitrage or to hedge a physical position in natural gas.
Europe turns to growing supplies of U.S. LNG
Trading activity in Henry Hub has historically been largely isolated to the U.S. market. However, the advent of LNG and the continuous build out of export capacity along the U.S. Gulf Coast has fundamentally changed the picture for the U.S. natural gas markets.
A combination of high natural gas prices and supply curtailments from Russia saw higher volumes of U.S. LNG exported to Europe. Europe’s LNG import capacity also expanded in 2022 to account for the growing imports of U.S. LNG. The Institute for Energy Economics and Financial Analysis noted that Europe has added 36.5 billion cubic metres of LNG capacity since the start of 2022.
The U.S. Energy Information Administration (EIA) expects European LNG import capacity to grow by one-third by the end of 2024 with more countries adding new LNG regasification facilities and expanding existing import terminals. Fitch ratings notes that the pipeline of approved LNG import facilities could see European imports increase by 74% in the coming years. European LNG import capacity is set to reach 406 bcm in 2030, an increase of 143 bcm from levels seen in 2021.
Chart 3: U.S. LNG shipments to Europe remain high
In the 12-month period to August 2023, Europe imported on average 183 BCF per month, this represents an increase of around 20% over the same 12-month period one year earlier. This volume represented around 55% of total U.S. Typically, volumes rise over the winter months to reflect the stronger demand for natural gas in the cooler temperatures so given this, volumes may rise further into the winter of 2023.
LNG exports, based on the latest data from the U.S. Energy Information Administration (EIA), show that the U.K and the Netherlands have remained the main European destinations for U.S. LNG. In the first eight months of 2023, U.S. LNG exports to both countries equated to around 103 BCF per month, which is around 70% higher than the volumes exported in the same six-month period in 2022. Total U.S. LNG exports to Asia-Pacific accounted for around 68 BCF in the 12-month period to August 2023, or 20% of total U.S. exports, which is a decline of around 13% compared to the 12-month period to July 2022.
The relevance of Henry Hub pricing to grow further
The growth of Europe as a destination market for LNG has seen a rapid transformation of the U.S. as a global supplier of natural gas. The relevance of Henry Hub as a global benchmark has become more evident with higher volumes of exported LNG using it as a price reference. The growing liquidity of Henry Hub futures during non-U.S. trading hours is another positive step in the development of the U.S. futures contract as a truly global benchmark.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.