Middle East supplies of crude oil are expected to contract further, starting in May, after the OPEC + group announced plans to cut production further.
This is expected to raise costs for refiners from Asia to Europe and prompt them to seek more supplies from Russia, Africa and the Americas.
Oil prices jumped more than $4 a barrel on Monday after the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, surprised the markets by announcing production cuts of about 1.16 million barrels per day from May until the end of the year.
The pledges will raise the total volume of OPEC+ cuts since November to 3.66 million barrels per day, according to Reuters calculations, equivalent to 3.7 percent of global demand.
OPEC + was expected to keep production stable until the end of this year, after it cut production by two million barrels per day last November.
An official at a South Korean refiner said the cut was "bad news" for oil buyers and that OPEC was seeking to "protect its profits" in the face of fears of a global economic slowdown.
The South Korean refining official and a Chinese trader said the supply cuts would lead to higher crude prices at a time when weak economies lead to lower fuel demand and prices, putting pressure on refinery profits. Both declined to be identified because they are not authorized to speak to the media.
Takayuki Honma, chief economist at Sumitomo Corporation Global Research, said OPEC+ crude oil supply cuts would be negative for Japan because it could increase inflation and weaken its economy.
"It seems that the producing countries want to see oil prices rise to 90-100 dollars per barrel, but higher oil prices also mean an increase in the risks of an economic slowdown and a slowdown in demand," he added.
Dealers said that the OPEC + production cuts come at a time when purchases from China, the world's largest crude importer, are expected to hit a record in 2023 as it recovers from the Covid-19 pandemic, while consumption remains strong from India, the world's third importer.
At the same time, traders and an Indian refining official said that the demand of European refiners for Middle East crude increased, especially Basra Heavy and Omani crude, to replace Russian oil, which has been banned by the European Union since December.
He added that "they will now face severe pressure," expecting that the market would suffer "a great shortage of supply."
Kuwait has already notified buyers that it will reduce its exports to reserve more crude for the Al-Zour refinery, while Saudi Aramco ramps up operations at the Jizan refinery.
Traders said Saudi Aramco, the world's largest oil exporter, which had been expected to lower its official selling prices for fixed-term oil sales to Asia in May, may now decide to raise prices instead.
The Indian refiner, who asked not to be named because he was not authorized to speak to the media, said that with higher prices and tighter supply of Middle East sour crude, China and India may be forced to buy more Russian oil, boosting Moscow's revenues.
He added that the rise in Brent crude prices may raise the price of Urals crude and other Russian oil products above the price ceiling set by the Group of Seven major countries in order to reduce Moscow's oil revenues.
While traders and analysts expected a surplus of crude in the second quarter with Asian refineries closed for maintenance and French refineries closed due to strikes, they now expect the OPEC+ cuts to tighten the markets ahead of the summer high demand season.
A Chinese refining source said the OPEC cuts would help absorb excess volumes in the West.
Refining companies in Japan and South Korea stated that they are not considering obtaining Russian barrels of oil due to geopolitical concerns, and may look for alternative supplies from Africa and Latin America.
"Japan can seek more supplies from the United States, but it is costly to transport US oil through the Panama Canal," Honma said from Sumitomo.
Traders are also watching the reactions of the United States, which described the OPEC+ move as unwise.
"To sum up, the purpose of this massive production cut is mainly to restore the market's pricing power," the Chinese trader said.