Saudi Arabia, Opec+ and oil price formation
Why does a Saudi production cut of a million barrels fail to drive prices higher?
Opec leader Saudi Arabia announced in early June a unilateral cut in oil production of 1mn bl/d from July. In addition, the wider Opec+ group announced a plan to limit oil supply to the end of 2024. So why did the market hardly move? At the heart of the problem is a narrative that fails to understand global price formation in the oil markets. Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, believes oil prices are driven by speculators, who drive prices well below the ‘fundamental’ levels supposedly determined by supply and demand. It is true that the absolute price level of oil is driven entirely by the financial market participants and not those who trade physical oil. Using th