Iran announced on Friday new military exercises in the Strait of Hormuz, but the West has readied plans to use strategic oil stocks to replace almost all Gulf oil lost if Iran blocks the waterway, industry sources and diplomats told Reuters.
They said senior executives of the International Energy Agency (IEA) discussed on Thursday an existing plan to release up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers.
This rate of release could be kept up for a month, offsetting most of the 16 million barrels a day of crude passing through the world's most important shipping lane that could be halted by an Iranian blockade.
Iranian officials have threatened in recent weeks to block the strait if new sanctions imposed by the United States and planned by the European Union, with the aim of discouraging Iran's nuclear program, harm Tehran's oil exports.
Earlier this week Iran said it would take action if the United States sailed an aircraft carrier through the strait, and followed this by announcing new military exercises, shortly after completing 10 days of naval drills in neighboring seas.
Real Admiral Ali Fadavi, naval commander of the Revolutionary Guards Corps, said the exercises next month would focus directly on the Strait of Hormuz, which leads out of the Gulf and provides the outlet for most oil from the Middle East.
"Today the Islamic Republic of Iran has full domination over the region and controls all movements within it," Fadavi said in remarks reported by the Fars news agency.
The United States, whose Fifth Fleet based in the area is far more powerful than Iran's naval forces, says it will ensure the international waters of the strait stay open. Britain said on Thursday that any attempt to close it would be illegal and unsuccessful.
In a brief respite from the rising tension between the two foes, the U.S. navy rescued 13 Iranians held hostage for weeks by pirates who had apparently used their fishing vessel as a "mother ship" for their operations, the Pentagon said on Friday.
The Iranians were freed by the very carrier group that Iran has said should not return to the Gulf.
The captain of the Al Molai expressed his "sincere gratitude" for their rescue by ships of the USS John C. Stennis carrier strike group, and the Iranians were returning home, a U.S. Navy officer with the strike group said.
New financial sanctions signed into law by U.S. President Barack Obama on New Year's Eve are aimed at making it difficult for most countries to buy Iranian oil. The European Union is expected to announce its own tough measures at end-January.
Most traders believe Iran will still be able to find buyers, at least for now, for its exports of 2.6 million barrels of oil per day (bpd). But it may have to offer steep discounts that reduce the revenue it needs to feed its 74 million people.
The sanctions are already hurting ordinary Iranians, faced with rising prices and a falling rial currency. They have been queuing at banks to convert their savings into dollars.
Iran holds parliamentary elections in two months, the first since a 2009 presidential election that led to nationwide mass street protests, put down by force. However, the Arab Spring has shown the vulnerability of authoritarian governments in the region to protests fuelled by anger over economic hardship.
Diplomatic sources in Vienna said Iran had come closer in recent weeks to starting uranium enrichment deep inside a mountain at a protected site near the holy city of Qom.
Starting production at the Fordow site could make it harder to revive nuclear talks that collapsed a year ago, worsening Iran's confrontation with the West.
Iran is already refining uranium to a fissile purity of 20 percent - far more than the 3.5 percent level usually required to power nuclear energy plants - above ground at another site.
It is moving this higher-grade enrichment to Fordow in an apparent bid to protect the work more effectively against any enemy attacks. It also plans to sharply boost output capacity.
Washington and its allies say Iran's nuclear program is aimed at producing an atomic bomb, and they are imposing the new sanctions to force it to abandon such plans. Iran says the program is peaceful.
European Union officials say the EU, which collectively buys about 500,000 bpd of Iranian oil, rivaling China as the largest market, has agreed to impose an embargo halting all imports.
EU diplomats said they are discussing how long they will give member countries to halt purchases, with France, Germany and others wanting the ban imposed within three months but Greece favoring a grace period of up to a year.
China has also cut its imports by more than half in January and February while haggling with Tehran over the size of the discount it wants in return for doing business with it.
Turkey, Japan and other big buyers say they are seeking a waiver from the U.S. sanctions.
The new American law allows Obama to give temporary waivers to allies to continue to buy Iranian oil to prevent a price shock, but to receive the permits, countries are meant to show they are reducing trade with Iran.
Iran has put on a brave face over the sanctions. Foreign Minister Ali Akbar Salehi said on Thursday it would "weather the storm," telling a news conference "Iran, with divine assistance, has always been ready to counter such hostile actions and we are not concerned at all about the sanctions."
He also said Tehran was interested in resuming negotiations over its nuclear program with Western powers, a sign it is trying to alleviate the pressure.
Turkey's visiting foreign minister brought an offer from Catherine Ashton, the EU foreign policy chief who negotiates on behalf of major powers.
Iran has repeatedly offered to restart the nuclear talks that collapsed a year ago but has insisted it will not negotiate over its right to go on enriching uranium. Western countries say talks are pointless unless a halt to enrichment is on the table.
Oil prices in spotlight
After years of sanctions that had little impact, Western countries have adopted a far more direct approach in recent months, imposing sanctions that explicitly impact the oil industry that provides 60 percent of Iran's state revenue.
The new U.S. measures would cut off any institution that deals with the Iranian central bank from the U.S. financial system. If implemented fully, it would make it impossible for most countries' refineries to buy Iranian crude.
But Washington has to balance its determination to isolate Tehran with concern that driving its oil off markets will raise prices and hurt the fragile global economy. Brent crude futures hovered above $113 a barrel on Friday, up nearly $7 since Obama signed the new sanctions law.
To ease the impact on markets, the new U.S. measures take effect over several months, and the offer of waivers gives countries time to find other suppliers. Saudi Arabia, the world's biggest oil exporter and a foe of Iran, says it will make up for any supply shortfall.
Traders and analysts believe Iran is unlikely to block the strait. "Neither side wants a war. A lot of this rhetoric is overstated," said Cliff Kupchan, Iran analyst at Eurasia Group.
If Iran did try to blockade the strait, it would be no match for a U.S. fleet led by the giant supercarrier John C. Stennis, accompanied by a guided-missile cruiser and flotillas of destroyers and submarines.
The Combined Maritime Force protecting Gulf shipping also includes countries such as Britain, France, Canada, Australia and the Gulf Arab states, under the command of a U.S. admiral.
There are other ways in which Iran could provoke a Western response, from missiles within range of U.S. targets in the region, to small boats that could attack a ship near shore, to allied militias in the Palestinian territories and Lebanon that can strike Israel.
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