The Global Rise of Henry Hub Liquidity

Trading activity in Henry Hub futures has historically been concentrated in regular US trading hours, largely because of the previously largely isolated nature of the US gas market. But with LNG now connecting US markets to the world, the number of transactions executed during Asian and European trading hours has risen for the second year consecutively.

As shown in Chart One, the average transaction volume during European and Asian hours reached a record high of 788,635 and 321,123 contracts, respectively, in Q1 2020. The volume then decreased in Q2 2020 and Q3 2020 ‒ but is still larger when compared to 2019. The new trend suggests that more Europe- and Asia-based LNG traders are relying on Henry Hub as a price reference to either capture any interregional arbitrage opportunity or to hedge a physical position.

Global LNG trading increased by an estimated 13% in Q1 2020 compared to Q1 2019, then declined from May to June due to the lockdown. Europe accounted for approximately two-thirds of world LNG demand during the first half of the year, even though pipeline base imports contracted from traditional suppliers Russia and North Africa.

Charts Two and Three depict the top 10 destinations of US LNG exports. In January 2020, the US reached a new record high of exported 74 LNG cargoes with a total 8.1 Bcf/d. Both in Q1 2020 and Q2 202O, South Korea received the lion share of exported volume (17%), followed by the UK and Spain with a share of 16% and 15%, respectively. However, COVID-19 mitigation efforts and a mild weather drove global demand for natural gas to drastically contract ‒ leading to cancellation of many cargoes. 

The industry relies on different indicators to measure and track market liquidity over time. Churn rate is considered as a key metric to determine if a hub is commercially successful and vibrant. This rate is defined as the ratio of trading volume to physical volume consumed. In essence, the churn rate is an indicative of the number of times a unit of natural gas is traded and re-traded before it is finally consumed. As shown in Chart Four, the churn ratio of Henry Hub reached a maximum of 51 in the second quarter of 2020, which is significantly higher than the threshold of ten² that has been established by the industry to classify a market as mature. This ratio has fluctuated between 36 and 51 in recent years. This strong level indicates the robustness and commercial relevance of the contract as a benchmark.

As the global LNG trade transitions from procurement-based deals to an actively traded market, liquidity will continue to be a prerequisite for balancing arbitrage interconnections across different regions. The growing liquidity of Henry Hub futures during non-US trading hours is another empirical sign of how the contract is creating around the clock multimarket linkages and has become a global benchmark.

Discover Henry Hub

1. ETH: 12 a.m. – 7 a.m. Central Time (CT), Monday through Friday on regular business days RTH: 7 a.m. – 4 p.m. CT, Monday through Friday on regular business days ATH: 4 p.m. – 12 a.m. CT, Monday through Friday on regular business days and at all times on weekends.
2. According to Heather and Petrovich (2017) in an Oxford Institute for Energy Studies paper: “Commodity markets are deemed to have reached maturity when the churn is in excess of 10 times. In this one metric all others are, necessarily, reflected: if there are many participants, trading many different products in large quantities, then the churn rate is likely to be high. The churn rate is used by traders as a ‘snapshot’ of a market’s liquidity; some traders will not participate in markets with a churn of less than 10 and many financial players will only participate when the churn is above 12 times.”