Crude oil prices settled the week lower after OPEC announced it had agreed to roll over its current policy of maintaining crude production in order to retain market share. The news came as no surprise as OPEC had been widely expected to maintain its year-long policy.
There was a slight chance the cartel would consider a cut in output in order to prop up the price of oil and to help out the poorer members of the cartel, but reports suggest that discussions about the topic never took place.
Rumors spread that OPEC would up its output ceiling to 31.5 million bpd. This was up slightly from its current production of 30 million bpd. Based on the sideways-to-lower price action, it looks as if investors may have been expecting the slight rise in production since reports show that OPEC had produced 31.77 million bpd in November and 31.64 bpd in October.
After the announcement was made, January Crude Oil futures sold-off through the psychological level at $40.00 and the low from earlier in the week at $39.84 before stopping at $39.60.
The price action suggests that short-sellers may be probing for stops in order to trigger an acceleration to the downside. The way the market straddling the $40.00 level after early session weakness indicates that there still may be a buyer in the market trying to prevent a “wash-out” to the downside.
Downside pressure should continue although we’ll be a little more confident once buyers start to come in to defend the $40.00 area. OPEC’s decision to overproduce is not the only factor pressing this market. U.S. producers have to share the blame. Although the U.S. rig count dropped by 10 this week to 545, compared with 1030 a year ago, the pace hasn’t been fast enough to put a major dent in U.S. stockpiles.
Look for the downside pressure to continue if sellers can sustain a move under $40.00 with conviction and as long as the U.S. inventory continues to trend higher.