Oil Supply and Price: What Is the Reality?

For decades, we have been taught a simple economic principle: prices are determined by demand and supply. But crude oil tells a different story. Demand and supply matter, yet they do not, by themselves, determine the price consumers ultimately pay.

I was confronted with this question in 2005 when an anchor of a leading business channel asked me live, what drives crude oil prices? My instant response was, “Crude oil prices are not driven by demand and supply alone; there are other factors which analysts either do not discuss or do not know.” After the program, the anchor remarked, “Kazmi Sahib, your white hairs do not mean people will accept your absurdity.”

Two decades later, the question deserves to be revisited.

Today, Middle Eastern crude exports have recovered to, and on some days exceeded, pre-war levels despite continuing disruption around the Strait of Hormuz. Yet Brent remains above US$100 a barrel. At the same time, Saudi Aramco has cut November crude prices for Asian buyers to a six-year low, while G7 countries have agreed to release 100 million barrels of crude and diesel from emergency reserves.

If supply alone determines price, such developments should have produced a much sharper decline.

The missing piece is the financial market. Crude is priced through highly sophisticated benchmark and futures markets in which fund managers, commodity traders, banks, physical traders and financial institutions constantly buy and sell expectations about future supply, demand and geopolitical risk. Brent futures are cash-settled, meaning positions can be closed financially without physical delivery. Yet those financial markets remain closely connected to physical benchmark pricing.

This creates a powerful feedback loop. Financial-market movements are reported almost hourly by major media houses. Headlines influence expectations; expectations influence trading; trading influences benchmarks; and benchmarks influence the prices paid for physical crude.

The result is that oil producers do not necessarily determine the price of their own product. Saudi Arabia, Russia, the United States and other producers can influence supply, but the marginal price is increasingly shaped by a financial ecosystem of traders, fund managers, benchmark mechanisms and information flows.

That is why the real beneficiaries of oil-price volatility may not always be producers. They can be the financial intermediaries and speculators positioned to profit from every rise and fall.

Perhaps it is time to ask a more fundamental question, who really sets the price of crude oil—the producers who pump it, or the financial markets that trade expectations about it?