March 14 (Bloomberg) -- The U.S. has received assurances from Saudi Arabia, the United Arab Emirates and Kuwait that they would raise oil production to help offset the effect of economic sanctions on Iranian exports, according to participants in discussions between the U.S. and oil-producing countries.
While there have been no formal requests, negotiations or agreements for increased output, the U.S. officials said they are confident that the Saudis and the UAE will boost production enough to prevent a dramatic increase in oil prices.
The three Arab countries had excess capacity of 2.47 million barrels of oil a day, with most of that coming from Saudi Arabia, according to the Paris-based International Energy Agency’s Feb. 10 market report. While that’s not enough to compensate for the loss of all of Iran’s 3.5 million barrels, it would help limit the increase in crude and gasoline prices that the sanctions cause when they start to take full effect in July.
“That’s a very pragmatic approach for the Saudis because they don’t want to see an oil shock and $150 crude,” Kyle Cooper, director of research at IAF Advisors, a Houston-based energy consulting firm, said by phone yesterday. “For some people in the market, it will be treated with a certain degree of doubt because Saudi Arabia probably cannot completely make up what Iran is producing.”
Brent crude, the benchmark for more than half of the world’s oil, has risen 18 percent this year on the London-based ICE Futures Europe exchange as the U.S. and Europe imposed sanctions on the Persian Gulf country. The oil is the third-biggest gainer among the 24 commodities on the Standard & Poor’s GSCI index. West Texas Intermediate, the U.S. benchmark, has advanced 8 percent on the New York Mercantile Exchange.
The U.S. and the European Union have imposed a series of economic sanctions on Iran in an effort to persuade Tehran to produce conclusive evidence that it has abandoned any efforts to develop nuclear weapons. Iran has said its nuclear program is for peaceful purposes and has threatened to close the Strait of Hormuz, the transit point for about 20 percent of globally traded oil, in reaction to the sanctions.
The alleged Iranian-sponsored attempt to assassinate the Saudi ambassador to the U.S. last year by bombing a Washington restaurant erased any hesitancy the Saudis may have had about raising production to offset declines in Iranian oil exports, U.S. and Saudi officials said. One of them called the Iranian move one of the stupidest things the Islamic Republic could have done, considering the sanctions targeting its oil exports. Iran said it “categorically” rejected the assassination allegation.
Increased output from Libya also could help markets cope with the loss of Iranian oil. Libyan Prime Minister Abdurrahim el-Keib said in an interview last week that production is 75 percent of the level before the violent Arab Spring revolt that ousted dictator Muammar Qaddafi last year, at 1.2 million barrels per day compared with 1.6 million before the rebellion.
While Libya is still facing divisive internal conflicts, one of the U.S. officials said, its location on the south side of the Mediterranean Sea and its reserves of light, sweet crude make it well positioned to make up the loss of Iranian oil to Greece, Italy and Spain.
“The basic assumption in the market is that Saudi Arabia will pick up the difference so the assurance won’t have much of an impact on prices,” James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas, said by phone. “The Saudis are behaving more or less as they have for the last almost 40 years. They don’t want to see prices so high that there is permanent demand destruction.”
The U.S. hasn’t asked for additional Saudi Arabian crude supplies from July onward, when international sanctions against Iran take effect, a person familiar with the kingdom’s oil policy said yesterday.
U.S. Energy Secretary Steven Chu said yesterday in Washington that the U.S. typically holds talks with producers to replace output lost through unplanned disruptions.
“We do have discussions with various countries on things like that,” Chu said, without directly saying if the U.S. had requested for additional oil from Saudi Arabia, the world’s largest crude exporter. “We do engage with countries in terms of, should there be interruptions to supply, should there be things of that nature, that countries with some spare capacity then could meet world demands.”
Saudi Arabia’s oil minister, Ali al-Naimi, is in Kuwait at a meeting of the International Energy Forum, a gathering of energy producers and consumers that takes place every two years.
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