The COVID-19 pandemic led to a sharp reduction in demand for natural gas in the first half of 2020 as major consumer nations went into lockdown, leading to a sharp fall in the price of CME benchmark Henry Hub futures.
The differing pace of economic recovery around the world, added to the impact on production of the US hurricane season, as well as the usual uncertainty around the severity of the upcoming northern hemisphere winter, have all combined to generate significant price volatility in the natural gas markets.
Market participants looking to manage this price risk turned to Henry Hub futures, which saw volume increase by 37% year-over-year by the end of July 2020.
The Henry Hub futures contract reached a peak in average daily volume (ADV) in Q1 2020. Volumes remained elevated relative to the prior year through Q2 and into July, and they were up 37% year-over-year.
As volumes grew in the first half of the year, there was a clear upward trend in non-US trading hours (5 p.m. – 7 a.m. CT). This underscores the growing international relevance of Henry Hub, with non-US volume growing by more than 50% year-over-year each month in the first half of the year.
As volumes in non-US trading hours increased, spreads during these hours remained very close to the tight spreads seen during US trading hours. This remained the case even during April 2020, when spreads during non-US hours widened slightly. Throughout Q2, US spreads remained fairly steady. Though non-US spreads were slightly elevated, they remained below 1.5 ticks on average.
This liquidity is crucial to ensuring global market participants can trade readily during their local time zones. With volumes increasing and spreads remaining tight, it’s clear that international traders are finding sufficient liquidity in Henry Hub to execute their strategies.
For traders in any time zone looking for more detail about liquidity in CME Group markets, the CME Group Liquidity Tool (available on our website) allows users access to multiple liquidity metrics, including the B/A spreads discussed above, for 18 core products across three time zones. Looking at the Henry Hub on this tool, users can get daily spreads for US, European, or Asian time zones.
Henry Hub volumes have increased, particularly during non-US trading hours. This volume was aided by tight spreads throughout the Globex session, with spreads during non-US trading hours tracking closely to the US hour spreads. Traders in any region can use the CME Group Liquidity Tool to get insights on these market dynamics and see how liquidity on core products responds to changes in the fundamentals of their markets.
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(s) 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.
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