Iran hits back at EU with own oil embargo threat

Smoke rises from the chimneys of an oil refinery near Corinth town, west of Athens, January 24, 2012.

TEHRAN (Reuters) - Fighting sanctions with sanctions in a test of strength with the West over its nuclear ambitions, Iran warned on Friday it may halt oil exports to Europe next week in a move calculated to hurt ailing European economies.

The Tehran government grappling with its own economic crisis under Western trade and banking embargoes, will host a rare visit on Sunday by U.N. nuclear inspectors for talks that the ruling clergy may hope can relieve diplomatic pressure as they struggle to bolster public support.

Since the U.N. watchdog lent independent weight in November to the suspicions of Western powers that Iran is using a nuclear energy program to give itself the ability to build atomic bombs, U.S. and EU sanctions and Iranian threats of reprisal against Gulf shipping lanes have disrupted world oil markets and pushed up prices.

Amid forecasts Iran might be able to build a bomb next year, and with President Barack Obama facing re-election campaign questions on how he can make good on promises - to Americans and to Israel - not to tolerate a nuclear-armed Islamic Republic, a decade of dispute risks accelerating towards the brink of war.

The U.S. Treasury Department said on Friday it would send its undersecretary for terrorism and financial intelligence, David Cohen, to Britain, Germany and Switzerland next week to talk about how to enforce sanctions against Iran's central bank.

Those sanctions aim to starve Iran of funds for developing nuclear weapons.

Western diplomats see little immediate prospect that renewed talks between Iran and the United Nations' International Atomic Energy Agency, scheduled from Sunday to Tuesday in Tehran, would result much in the way of concessions to Western demands.

For all the tension, there was little clear market response to Friday's talk by members of Iran's parliament that they may vote on Sunday to stop sending oil to the European Union - its second biggest customer - as early as next week, to spite EU states that gave themselves until July to enforce an oil import embargo on Iran.

Greek and Italian refineries which rely on Iranian crude face hardships - recession-hit Greeks have bought more than half their oil from Iran lately. But analysts see Arab producers satisfying some shortfall, and demand for Iranian oil from China and other Asian countries that do not back Western sanctions may mean world oil flows are merely diverted rather than blocked.

RHETORIC

Traders admit to wearying of rhetorical thrust and parry.

"They are the masters of bluffing," one Mediterranean crude oil trader said of remarks by Iranian lawmakers on Friday. "And they aren't very reliable when they threaten extreme measures," he said, noting the serious practical difficulties for tankers and storage plants of diverting 700,000 barrels of oil per day.

"That said, we are living in strange and difficult times," he added, as Brent crude futures gained 0.8 percent to $111.64 on the threat, while disappointing U.S. GDP data pushed prices back.

In Tehran, Hossein Ibrahimi, vice-chairman of parliament's national security committee, was quoted by the semi-official Fars news agency as saying: "On Sunday, parliament will have to approve a 'double emergency' bill calling for a halt in the export of Iranian oil to Europe starting next week."

Moayed Hosseini-Sadr, a member of the energy committee in the legislature, said there would be no delay of the kind the EU allowed to its members on Monday when it imposed a ban on oil imports from Iran that would take full effect only on July 1.

"If the deputies arrive at the conclusion that the Iranian oil exports to Europe must be halted, parliament will not delay a moment," Hosseini-Sadr said. "The Europeans will surely be taken by surprise and will understand the power of Iran."

Echoing President Mahmoud Ahmadinejad, who said on Thursday that Europe would be the loser from its sanctions policy, the hardline cleric leading Friday prayers at Tehran university jibed: "Why wait six months, why not right away? The answer is clear. They are in trouble; they are grappling with crisis."

That comment from Ahmad Khatami indicated the pre-emptive export ban is backed by Supreme Leader Ayatollah Ali Khamenei.

The EU accounted for 25 percent of Iranian crude oil sales in the third quarter of 2011. But China, India and others have made clear that they are keen to soak up any spare Iranian oil, even as U.S. Treasury measures to choke Tehran's dollar trade make it harder to pay for supplies.

SANCTIONS

Highlighting the difficulties of securing global sanctions when many governments, including Russia and China, question their value or say they will only harden Iranian defiance, Turkish state-controlled Halkbank, a key player in handling payments for Iranian oil, said it would keep on doing so.

A manager at the bank told Reuters that, as far as it was concerned, it was not in breach of U.S. financial sanctions.

The EU's response was muted, saying that Iran's intentions had been reported. "We want to see Iran coming back to the negotiating table, engaging in meaningful discussion on confidence-building measures and demonstrate the willingness to address concerns over its nuclear program, without preconditions," said Maja Kocijancic, spokeswoman for EU foreign policy chief Catherine Ashton.

In Paris, where President Nicolas Sarkozy has been vocal in criticizing Iran, Foreign Ministry spokesman Bernard Valero stressed that EU countries were already in the process of finding alternative supplies of oil and he was dismissive of the comments from Tehran.

"It's the little game of statements that they carry out artistically," Valero said.

A senior European executive for an oil company that buys Iranian crude told Reuters there could still be problems for some if Tehran cut off supplies immediately. "We have to wait and be ready. The Iranians have been backed into a corner and it's hard to predict how they will react," he said.

Iran's conservative-dominated parliament has previously shown it is ready to force the government to take action against what it sees as hostility from the West, and oil analyst Samuel Ciszuk said it was likely the assembly would pass the EU ban.

"It makes sense to demonstrate Iranian resolve and that it is not on the back foot, particularly as the measure could hit European refiners at a time of deep economic weakness," said Ciszuk of London consultancy KBC Energy Economics.

An abrupt halt might, however, force Iran to offer discounts to other buyers in order to shift excess output, he added.

RISKS

Asian buyers might be tempted but are also wary of U.S. disfavor. "Even though China and India could take the opportunity to capitalize on Iran's weakness, they currently have little appetite for the resulting international fallout," said Paul Tossetti at consultancy PFC Energy in Washington.

Iran's clerical establishment, having faced down popular protests which followed Ahmadinejad's disputed re-election in 2009, is dealing with internal disagreement on policy while preparing to seek public endorsement at a closely managed parliamentary election in March.

Defending Iran's right to civilian nuclear has been popular, but galloping inflation, which saw the rial formally devalued this week, is fuelling discontent with a ruling class that is also accused of corruption and putting its own interests first.

The diplomatic battleground will move to Tehran with the weekend arrival of an IAEA delegation, expected to number about half a dozen led by inspections chief Herman Nackaerts.

The IAEA director-general, Yukiya Amano, said in Davos on Friday: "I expect through this high level mission Iran tells us everything we need to know and resolve the issue."

Western officials who work with his agency view that kind of sentiment as diplomatic, but wildly unrealistic.

"Nobody is optimistic," one envoy said.

(Additional reporting by Fredrik Dahl in Vienna, Richard Mably and Jessica Donati in London, and Glenn Somerville in Washington; writing by Alastair Macdonald; editing by Angus MacSwan and Mohammad Zargham)