Because "real-time" wellhead natural gas prices are not always available, market participants have adopted Henry Hub spot and futures prices as a surrogate measure for the current wellhead price. Several publications report prices daily at Henry Hub, the largest centralized point for natural gas trading in the United States.

The Energy Information Administration (EIA) reports an average wellhead price for natural gas in its Natural Gas Monthly publication, after the final production and price data are received on Form EIA-895 "Monthly Quantity of Natural Gas Report."

EIA frequently has been asked about the relationship between the Henry Hub spot prices and U.S. wellhead prices. A new EIA analysis, "U.S. Natural Gas Markets: Relationship Between Henry Hub Spot Prices and U.S. Wellhead Prices" examines the relationship between these two series for the period spanning August 1996 through December 2000. The results indicate that there is a strong linear relationship between the two price series.

Henry Hub spot gas represents natural gas sales contracted for next day delivery. The analysis uses Natural Gas Week's monthly Henry Hub spot price, a volume-weighted average price of spot transactions. The Henry Hub spot price pertains to transactions for delivery at the Henry Gas Processing Plant and is measured downstream of the wellhead, after the natural gas liquids have been removed and after a transportation cost has been incurred.

In contrast, the wellhead price includes the value of natural gas liquids and pertains to all transactions occurring in the United States, thereby encompassing purchase commitments of all durations.

Analysis Results

For the period from August 1996 through December 2000, the correlation coefficient for Henry Hub spot prices and U.S. wellhead prices is 0.975, indicating a strong linear relationship.

The analysis examines the actual difference between the Henry Hub spot price and the wellhead price (in 2000 dollars) over the same period. The mean (arithmetic average) price difference is 31.6 cents per thousand cubic feet, and the median value is 23.6 cents per thousand cubic feet. Both values are consistent with the notion that the Henry Hub price includes a transportation cost for moving the natural gas from the wellhead.

The spread of 8 cents per thousand cubic feet between the mean and median indicates that the distribution of observations is not symmetric around the mean. Moreover, the standard deviation of 38.5 cents per thousand cubic feet indicates a relatively wide distribution of observations.

Given the large difference between the mean and median values and the relatively large standard deviation, the price difference is not a particularly precise expression of the relationship between the two prices. Because of the nonsymmetric nature of the observations, the median value might be more representative of the central tendency of the data than is the mean value.

	Descriptive Statistics Henry Hub Spot Price Minus U.S. Wellhead Price August 1996-December 2000
		Actual Price Differencea	Percent Difference
	Mean	31.6	10.8
	Median	23.6	10.4
	Standard Deviation	38.5	8.5
	a2000 cents per million cubic feet. Source: Energy Information Administration.

The paper also evaluates the percent difference between the Henry Hub price and the wellhead price. The percent difference approach has several advantages relative to the actual difference. First, the mean and median values are close to each other, at 10.8 percent and 10.4 percent, respectively, indicating a more symmetrical distribution, as shown in the table.

Moreover, the standard deviation (8.5 percent) is less than both the mean (10.8) and median (10.4) values, indicating a narrower distribution of observations. Consequently, the percent difference measure appears to be a better measure of the relationship between the Henry Hub spot price and the wellhead price of natural gas.

Conclusions

The percent difference appears to be a better measure of the relationship between the two prices than does the actual difference, because

(1) the mean and median values of the percent difference are in close agreement, indicating a more symmetric distribution of observations;

(2) the magnitude of the standard deviation is lower, indicating a narrower distribution of observations around the mean; and

(3) the percent difference relationship can be evaluated without translating nominal prices into real (constant dollar) prices.

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File last modified: August 26, 2002