Crude Oil Plummets on OPEC Decision

As crude oil falls lower and lower on declining demand, producers agree to increase production anyway.

OPEC Agrees January 2022 Supply Hike

Less than one month ago, WTI Crude Oil was trading at about $85 per barrel, which was a multi-year high price. Over the past three weeks the price descended rapidly from that high, and today extended that trend to approach the 6-month low price at $61.76. The pace of this downwards trend accelerated a few days ago with the news of the discovery of the omicron coronavirus variant. As there are fears that this variant may be dealt with by lockdowns and trade shutdowns or delays, if its potency is revealed to be high, we can expect a drop in demand, which will inevitably mean a drop in the price of WTI Crude Oil.

It was against this backdrop that the Organisation of Petroleum Exporting Countries (OPEC) agreed a short while ago to extend the supply of January 2022 Crude Oil by 400,000 barrels per day. There are initial reports that the members are also agreed to review this decision if demand does drop rapidly over the coming weeks.

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WTI Crude Oil Price Action

The price of WTI Crude Oil has fallen strongly over the past few days. It has fallen by more than 25% in value since reaching a multi-year high of $85.39 on 25th October 2021. The pace of the fall has quickened recently. The drop is showing what might be initial signs of exhaustion as it approaches the key support level at $61.89 which represents the lowest price seen since May 2021.

WTI Crude Oil Price Chart

WTI Crude Oil Price Chart

What Does This Mean for Traders?

Traders should be aware that if the omicron coronavirus variant is resistant to existing vaccines and can also cause serious illness to vaccinated people, governments may well react by initiating another round of shutdowns for a while, as they did in March and April 2020 when the disease really began to spread worldwide.

The lockdowns, shutdowns, and trade restrictions that were put in place in the spring of 2020 did a great deal of economic damage, although most economies rebounded strongly after this period as restrictions were eased.

The panic of March 2020 saw huge and very rapid directional movements in the markets, but nothing was as spectacular as the price action in WTI Crude Oil, with futures actually going into negative territory for a while. This and the subsequent strong rebound gave traders and speculators some incredible trade opportunities, first short, then long.

If history is going to repeat itself, even if on a smaller scale, the price of WTI Crude Oil has good reasons to fall further, in line with the long-term trend. How far it might fall is anyone’s guess, but if omicron is economically destructive, it is very likely to.

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