SINGAPORE Reuters -- Concerns over tight oil supplies and soaring inflation have intensified after the OPEC group of nations announced its largest supply cut since 2020 ahead of European Union embargoes on Russian energy.
The move has exacerbated the diplomatic rift between the Saudi-backed bloc and Western nations, because they worry that higher energy prices will hurt the fragile global economy and hinder efforts to deprive Moscow of oil revenue after Russia invades Ukraine.
After the Organization of the Petroleum Exporting Countries and their allies, including Russia, agreed to reduce output by 2 million barrels per day, global crude futures returned to three-week highs, returning to three-week highs.
Inflation concerns as governments from Japan to India fight rising cost of living while Europe is expected to burn more oil this winter to replace Russian gas, will likely cause spot prices to go higher, especially for Middle East oil, which meets about two-third of Asia's demand, industry participants said.
A spokesman for South Korea's largest refiner SK Energy told Reuters that they were concerned about a resurgence in international oil prices, which have shown signs of calming down since the second quarter.
Another South Korean refining source said the supply cut could lead to prices falling back to levels seen in the second quarter.
South Korea, Asia's fourth-largest economy and manufacturing powerhouse, has seen its costs skyrocket due to the surging commodity prices.
In March, Brent hit $139.13 a barrel, the highest since 2008, after the Ukraine war sparked fears of Russian oil supply loss. Saudi Energy Minister Abdulaziz bin Salman said that the real supply cut would be between 1 million and 1.1 million barrels per day, a response to rising interest rates and a weaker world economy.
Washington criticized the OPEC deal as shortsighted, as a result of that move. President Joe Biden would continue to assess whether or not to release more strategic oil stocks to lower prices, according to the White House.
The United Arab Emirates, Saudi, UAE and Kuwait are likely to take most of the burden of cuts, said Tilak Doshi, managing director of Doshi Consulting, who was previously with Saudi Aramco.
He said it was a slap on Biden's face by OPEC and that ties between Russia and Saudi seem increasingly tight.
RBC Capital analysts believe that follow-on sales would be more incremental, as the U.S. reserves release will accelerate ahead of the U.S. midterm elections in November.
The bank said that we are unlikely to see another blockbuster release in the near term.
The OPEC reduces compound supply concerns as European Union sanctions on Russian crude and oil products take effect in December and February.
Industry participants estimate the loss of Russian crude at between 1 and 2 million barrels per day, depending on how Moscow reacts to the G 7 price cap on Russian oil. The policy aims to make Russian oil flow to emerging economies but at lower prices to reduce Moscow's revenues.
A Singapore-based crude oil trader who refused to be named due to company policy said the market is still underpricing the actual loss.