Recently I was on flight where the panel for the oxygen mask, above my seat, looked like on the picture: the "button" in the middle of the panel was extended, turned and was showing a red tag on the side.

I asked a member of the cabin crew if this indicated a problem and the response - after he had tried to turn and push it in - was "I don't know, I don't think so". The fact that he couldn't turn it, or push it back into the panel, makes me think that it is more than just a locking mechanism, that it might have indicated that the system was out of order and I should've moved to a different seat.

Was my hunch correct, does this indicate a faulty oxygen mask?

The plane was an Embraer 190.