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U.S. Won't Tap Oil Reserves To Offset Price Spike From Iran Sanctions

U.S. Secretary of Energy Rick Perry at a recent summit in Europe.

Energy Secretary Rick Perry said the U.S. government isn’t considering releasing oil from its massive crude reserves to prevent prices from spiking when sanctions on Iran go into effect in November.

Releasing oil from the U.S. Strategic Petroleum Reserve, which is the world's largest government stockpile of oil, would have only "a fairly minor and short-term impact” on prices, Perry told reporters in Washington on September 26.

Oil analysts have speculated for months that the administration of President Donald Trump might tap the reserves in an effort to tame rising prices, especially with congressional elections looming on November 6 which will determine whether Trump's Republican party retains control of Congress.

Oil prices soared after Trump announced in May that he was abandoning Iran's 2015 nuclear deal with world powers and reinstating economic sanctions on Iran.

Brent premium crude prices rose as high as $82.55 in London trading this week, the highest since November 2014, in part over worries about the reimposition of U.S. sanctions on Iran.

The higher oil prices have posed a political risk for Trump and his fellow Republicans in Congress as they face U.S. voters, some of whom are angry about their higher costs of transportation.

The U.S. reserves currently holds about 660 million barrels of oil in underground caverns in the states of Texas and Louisiana.

The reserves are primarily kept for economic emergencies, but under U.S. law, the government can sell up to 30 million barrels of oil -- or about the amount of petroleum the United States uses in 36 hours -- from the reserves over a number of weeks in non-emergency situations.

Perry said that while short-term price spikes are possible when sanctions against Iran's oil sector go into effect on November 5, "I'm comfortable that the world supply can absorb the sanctions that are coming."

"We got some opportunities to fill the void as sanctions go into place," he said, adding that in some ways,"the market has already adjusted."

One country that could make up some of the shortfall from stifled Iranian exports is Iraq, Perry said. He estimated that an additional 300,000 barrels per day of oil could reach markets if Baghdad allows it to flow through a pipeline from Iraq's Kurdish autonomous region in the north.

He said an additional 300,000 barrels a day could come to market soon from an oilfield in the Neutral Zone that Saudi Arabia and Kuwait share, if agree to tap the oil.

Oil producers from Russia and the Organization of Petroleum Exporting Countries met over the weekend but ruled out any immediate increase in output, in a move that rebuffed Trump's repeated calls for an increase from oil producers.

As Washington moves to reimpose sanctions on Iran's oil sector that were lifted for more than two years under the nuclear deal in exchange for curbs on Iran's nuclear activities, the White House has warned Iran's clients that they must reduce their purchases to zero or face U.S. penalties.

But Perry suggested that Washington might accept a more gradual reduction in oil purchases by some countries, saying he thought the sanctions could be carried out on a "graduated" basis with limits on purchases increasing over time. He did not offer further details.

With reporting by Reuters and Bloomberg