The best way to describe the current commodities market would be uninterrupted volatility. For the past year, crude, gas and liquids prices have consistently fluctuated up and down as the market has been hit with a multitude of macro headwinds ranging from supply exceeding demand, weaker Chinese economy and an unsettled U.S. dollar. The biggest uncertain condition in the market is the question of how much crude will be produced by OPEC as well as how many barrels (bbl) will be released from Iran and Iraq this year.

The latest example of OPEC’s grip on the current market was provided this week when crude prices rose after it was announced that Saudi Arabia, Venezuela, Qatar and Russia would freeze production at January levels. The agreement requires other producers join in, but it isn’t expected to have a major impact on prices, according to Barclays Capital.

“It is vital to note that there was not much incremental production expected from Russia, Qatar and Venezuela for the rest of the year, given these countries are already stretching their production limits,” the investment firm said in a Feb. 16 research note. The report stated that production out of these countries was expected to be flat to down this year.

Most important, the agreement failed to include Iran and Iraq, which are the countries that are expected to have the largest increase in production this year as they return to the global market. Already Iraq production was at near record highs in January and Iran has indicated plans to re-establish pre-sanction output levels.

Even if the agreement were to succeed in freezing output and improving crude prices, it would likely provide an incentive to U.S. shale producers to being drilling again. This would cause a downturn in prices once again as supplies would almost certainly exceed demand.

The good news is the announcement is the first indication since the fall of 2014 that Saudi Arabia is willing to take another approach besides drill at all costs. For the first time in a long time uncertainty in the market may not be a bad thing.

Unfortunately NGL prices failed to follow this upward swing as the theoretical NGL barrel price fell at both Conway and Mont Belvieu. It was down 2% to $14.73/bbl at Conway with a 9% gain in margin to $8.74/bbl and down 3% to $15.11/bbl with a 3% gain in margin to $8.60/bbl.

The margin gains are primarily attributable to the ethane market; however, they are not a sign of an improving market. Instead these gains are due to the relative stability of ethane prices while natural gas prices suffered large losses at both hubs due to large storage overhangs in the market.

Interestingly gas prices fell to their 12-month lows despite a solid natural gas storage withdrawal report from the U.S. Energy Information Administration. The agency reported that storage was down 158 billion cubic feet to 2.706 trillion cubic feet (Tcf) the week of Feb. 12 compared to 2.864 Tcf the prior week. This was 25% greater than the 2.174 Tcf posted last year at the same time and 26% greater than the five-year average of 2.151 Tcf.

It is possible that the gas market is currently experiencing the beginning of a rebalancing as winter is drawing to a close. While prices will be challenged in the coming month, En*Vantage reported that there could be a “significant recovery” by the end of the year.

“We should enter the fourth quarter with lower production levels as producer after producer announces very large CAPEX cuts and many of them forecasting production declines in 2016. We will also see increases on the demand side of the equation with industrial demand, LNG exports and growth of exports to Mexico. This is of course assuming that we have the normal weather as well as North American staying out of recession,” the advisory firm said in its Feb. 18 Weekly Energy Report.

Frank Nieto can be reached at fnieto@hartenergy.com.

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