Official: Gulf states ready to offset Iran oil

[December 28, 2011]  RIYADH, Saudi Arabia (AP) -- Gulf Arab nations are prepared to offset any potential loss of Iranian oil in the world market, a senior Saudi oil official said as Iranian officials stepped up their rhetoric Wednesday about shutting off a key supply route.

The remarks from the world's largest oil producer came after Iran's vice president on Tuesday warned his country was ready to close the Strait of Hormuz -- a vital waterway through which a sixth of the world's oil flows -- if Western nations impose sanctions on its oil shipments.

And on Wednesday, Iranian navy chief Adm. Habibollah Sayyari, added that Iran's Navy can readily block the strait if need be. His comments to Iran's English-language state Press TV came as Iran held a 10-day drill in international waters near the strategic chokepoint.

Western nations are growing increasingly impatient with Iran over its nuclear program, and worries abound that new sanctions on the country could target its oil exports.

While the comments by Vice President Mohamed Reza Rahimi and the Iranian admiral may be little more than a warning by the Islamic Republic, they still stoked fears in the market.

A closure of the strait could temporarily cut off some oil supplies and force shippers to take longer, more expensive routes that would drive oil prices higher. It also potentially opens the door for a military confrontation with Iran that would further rattle global oil markets.

The Saudi oil ministry official told The Associated Press that OPEC kingpin Saudi Arabia and other Gulf producers were ready to step in if necessary. He did not say what other routes the Gulf nations could take to ship the oil if the strait was closed off. The official spoke late Tuesday on condition of anonymity because he was not authorized to discuss the issue.

Theodore Karasik, an analyst at the Dubai-based Institute for Near East and Gulf Military Analysis, said Iran would likely need to use a combination of sea mines and direct attacks on ships passing through the strait to truly close it.

"They would physically have to attack and maintain hold of that property. And everyone in the neighborhood is going to (try to) stop them," Karasik said.

Reflecting unease over the rising tensions in the Middle East, the U.S. benchmark crude futures contract for February deliver was up above $101 per barrel in electronic trading on the New York Mercantile Exchange. Its London-based Brent counterpart fell slightly, but still remained above $109 per barrel on the ICE Futures exchange.

Saudi Arabia, the world's largest oil producer, has been producing about 10 million barrels per day, leaving it with over 2 million barrels per day in spare capacity.

The oil rich kingdom is widely seen as the only producer able to offset production losses elsewhere. But others would have to also boost their output to accommodate a loss of exports from Iran, which is the world's fourth largest oil producer.

Gulf Arab oil ministers, who met in Cairo on Dec. 24, declined to comment on whether they were eying alternative routes for oil in the case that Iran closes off the Strait of Hormuz. The ministers had gathered for a meeting of the Organization of Arab Petroleum Exporting Countries.

OPEC, of which both Iran and Saudi Arabia are members, agreed on Dec. 14 to set its output ceiling at about 30 million barrels per day -- in line with the bloc's current production. In the OAPEC meeting in Cairo days later, the ministers appeared comfortable with that level and said future moves would be determined based on demand and supply fundamentals in the market.

Sanctions targeting Iranian oil would hit Europe and Asia markets hardest. Crude from the country does not go to the United States because of existing sanctions.

The West maintains that Iran is pursuing nuclear weapons, a charge the country denies. Iran says its nuclear program is purely for peaceful purposes, such as generating electricity.

[Associated Press; By TAREK EL-TABLAWY and ABDULLAH SHIHRI]

El-Tablawy reported from Cairo. AP Business Writer Adam Schreck contributed reporting from Dubai, United Arab Emirates.

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