Traders Bet on OPEC Cutback Extension, But U.S. Syrian Bombings Cast Serious Doubt on Cartel Continuing to Curb Output

Russia again says it's too early to discuss an extension to the oil cutback deal.

It's long been a heated topic of debate whether the Organization of the Petroleum Exporting Countries (OPEC) has the ability via its production cutbacks to curb the global oil glut, and its ability has been cast into even further doubt with Thursday's U.S. air strikes against Syria - but as far as traders are concerned, they are betting on OPEC - and the extension of the cartel's cutbacks to the end of this year - by selling their stakes in storage tank businesses that have profited from oversupply.

Reuters reported that Glencore, Vitol, and Gunvor have completed or have been attempting to sell parts of their holdings in storage firms since January, with Vitol's deal agreed to last October just prior to OPEC announcing it would cut output.

Glencore's sale of a 51 percent stake in its global oil products storage business for $775 million to China's HNA occurred last week; Gunvor is selling a share in a Rotterdam storage facility; Reuters also notes that Trafigura is working on its IPO in privately owned Puma Energy, a venture with Angola's Sonangol Holdings LDA and Cochan Holdings.

Jean-François Lambert, founding and managing partner of Lambert Commodities, said prospects for a more balanced market were partly behind the timing, as well as factors such as freeing up cash to trade: "The traders picked the right time to sell.

"If you have an opportunity to sell assets to lighten your balance sheet without losing control then you do it."

The success of the strategy depends on whether the market shifts to a sustained backwardation, and Reuters notes that while the market came close to returning to this mode in February, the strong comeback of U.S. shale and other long-planned supply additions could prevent it from happening.

And the prospect of OPEC extending its crude reduction initiative to the end of the year is problematic at best:  once again, Alexander Novak, energy minister for Russia, echoed statements previously made by many of his OPEC counterparts when he told media on Friday that it's "premature" to say if the deal should be extended.

He added that it will be clearer by the beginning of May if circumstances warrant OPEC taking more actions.

Thursday's U.S. missile strikes on Syria only make the extension prospects even more doubtful:  CNBC argued that the strikes "drive a wedge between the Sunni nations...what all these countries need is for everyone to cooperate and make sure they uphold these production quotas, and that means Russia as well" - but the strikes could cause them to acknowledge that some nations have been cheating on their quotas and relax their own standards, thus driving production upward.

Michael Cohen, head of energy commodities research at Barclays, replied, "This is the biggest bearish risk to all of this: we've got this OPEC meeting on May 25, and one of the most important factors that led all these countries to actually get to a deal back in November of 2016 was the involvement of Russia."

Now that Russia is accusing the U.S. of violating international law, the elements for a wedge to be driven between these two key countries and the Middle East are coming together, and Cohen says if this transpires, "the likelihood of an amicable outcome in May is less."

While all eyes are now on Russia with regards to the Syrian strikes and its willingness to back further OPEC cuts, it should be noted that the former Soviet Union has long been planning to ramp up production immediately following the expiry of the OPEC deal in May: Rosneft, private Lukoil, private producer Surgut, state-owned GazpromNeft, and Tatneft will collectively raise production by around 1.6 percent on average in 2017, while other sources believe production will reach record levels after the expiry of the OPEC agreement.