Thursday, October 1, 2009

Here We Go Again

The market did not like natural gas today. The Henry Hub spot price went down 36 cents to $2.92, a drop of 11%. The gas storage numbers keep going up, the dollar is getting stronger and several economic indicators of business activity went down slightly.

I've been asked several times why I follow the Henry Hub spot price. What most people see and hear quoted is the front month NYMEX futures price (today: down 7.7% to $4.47). Futures prices are an easy number to quote because futures contracts are actively traded and their prices are reported in real time. Henry Hub prices are usually only reported once per day in the late afternoon.

I look at the spot price because I believe it is a good proxy for wellhead price, on which royalties are based. I looked at monthly information from the Energy Information Agency from January 2008 to compile the chart below, which shows that the Henry Hub spot price is pretty well correlated with wellhead prices, especially over the past 14 months.

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