Investors Dissatisfied in OPEC’s Production Policy; Prices Plunge 5%

U.S. West Texas Intermediate and internationally-favored Brent crude oil prices tumbled more than 5 percent on Thursday after OPEC and other major producers announced they would extend their current deal to curtail oil production for nine months, or through March 2018.

Going into today’s meeting, traders were widely expecting a six to nine month extension and based on the price action this week, it looked as if this news was already being priced into the market. Therefore, when it was announced that the new deal would limit production for nine months, investors were largely disappointed because they were also betting heavily on deeper production cuts.

The details of the meeting are finally being made available.

Ahead of the meeting and based on activity throughout the week, investors were long crude oil into the meeting because the Saudi’s had advertised through their agreement with Russia and Iraq that they were going to be pushing for a nine-month extension. Because of the weight they carry in OPEC, most speculators thought this would mean that a nine-month extension would sail smoothly through the negotiations process.

The recent price action and activity by the speculative hedge and commodity funds suggested that investors were playing for more upside. Knowing that the nine-month extension was pretty much a given, this could only mean that they were playing for a major announcement from OPEC such as deepening the production cuts.

Ahead of the closed-door meetings, Khalid Al-Falih, Saudi Arabia’s energy and industry minister, may have offered the earliest clue that the cartel and the other producers would not be going for deeper cuts. He was quoted as telling CNBC, “Nine months with the same level of production that our member countries have been producing at is a very safe and almost certain option to do the trick.”

This news may have started the earliest rumors that began generating today’s earliest selling pressure.

After the meeting, Saudi Arabia’s delegate said all options had been considered ahead of the announcement, including deeper cuts and a possible six-month extension. He further added that OPEC discussed extending the cuts through June 2018 if the market deteriorates, according to Dow Jones.

The new assessment process will include a review near the end of the nine-month extension and a decision to extend or deepen the cuts will be made at that time. The basis for further extensions and cuts will be determined by the global stockpile levels and the price of oil.