Various ministers from non-OPEC and OPEC countries that export oil reached an agreement for extending their present production cuts over the period of next nine months up to March 2018. The front-month prices of Brent Crude Futures closed down at $2.50 per barrel, translating to more than 4%. The decline in prices was evident when OPEC declared that it would roll over the existing production cuts instead of deepening them.
This market reaction appears to be consistent with studies revealing that prices are slated to fall when the output is left unchanged by OPEC. Considering the case in point, the declining price is a reflection of the repositioning of the market participants including short-term traders instead of a re-assessment of the supply and demand dynamics.
Market Participants Opted for Long Position Prior to Outcome
A number of crude oil traders raised up prices prior to the meeting just in case the ministers declared a deeper cut. Despite the OPEC and non-OPEC ministers always having hinted that a rollover was more likely to be the result of the meeting, there was always a chance, however negligible, of a deeper cut. Consequently, a majority of market players tended to either hold flat or a long position at the time of the meeting, with the possibility of a surprise of a deepened cut sending the prices escalating.
A Classic Crowded Trade Results from Simultaneous Liquidation of Long Positions
The removal of the threat of a further cut and the confirmation of the rollover has led to liquidation of these long positions that became invalid. When a large number of long positions were being liquidated simultaneously and fresh short positions were being sought, the situation lead to a classic crowded trade.