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(Reuters) - Western trade sanctions against Iran have begun to strangle its oil exports, a U.S. advisory body said, amid signs the squeeze on Tehran is only set to intensify and could push global crude prices higher unless Washington eases its grip.
With crude prices trading at around 10-month highs and limited spare production capacity world-wide to make up for the embargo on Iran, the United States may seek to offer Iran's major trade partners more room to move on sanctions.
Iran's biggest oil customers, including China, Japan and India, have become tangled up in the U.S.-led sanctions aimed at curbing Iran's nuclear ambitions. Unless they cut back on Iranian crude, they could harm their own U.S. trade ties.
"With oil inventories and spare OPEC production capacity running low, consumers don't have much buffer against additional disruptions in supply," said Trevor Houser, a partner at Rhodium Group and a former State Department adviser.
"That means the needle the administration has to thread to pressure Iran without raising oil prices has gotten even smaller."
Washington is concerned about rising U.S. petrol prices ahead of November presidential elections and hopes to avoid inflaming global markets. U.S. President Barack Obama can temporarily waiver sanctions if it is in the national interest.
The Energy Information Administration, an independent arm of the U.S. Department of Energy, Wednesday said Western insurers were declining to cover the trade risk on some Iranian oil shipments.
On June 28, Washington will slap sanctions on foreign banks facilitating Iran's oil trade, ratcheting up pressure not only on Tehran but also the global banking sector. Wednesday, news emerged that the U.S. government recently forced Dubai-based Noor Islamic Bank to stop channeling Iranian oil money.
The world's biggest electronic bank clearing system, SWIFT, is preparing to block Iran's central bank from using its network to transfer funds -- a move that could further exacerbate Asia's already-stressed oil trade with Iran.
To cut its reliance on Iranian crude, India revealed on Wednesday it had sought up to 80,000 barrels per day extra oil from Iraq in 2012/13, days after placing a similar request with top exporter Saudi Arabia. India now buys more than 340,000 bpd oil from its third-largest crude supplier, Iraq.
Traders also noted Iran was trying to sell about 200,000 tones of crude oil from a supertanker floating off Singapore, a rare move. In another sign of more spot Iranian cargoes looking for a home, they said a vessel heading toward China was carrying volumes greater than the usual term-contract supplies.
The EIA report, which looked at global oil output and prices over the last two months since Obama signed the sanctions into law, said markets had become increasingly tight.
It said global spare crude production capacity was "quite modest" by historical standards, especially in the context of global uncertainties that were not limited to Iran.
There could be a global supply gap of 1.6 million barrels per day if Iranian oil was completely taken out of the picture, the report said. Iran has threatened to retaliate against the sanctions by closing the Straight of Hormuz, which carries nearly 20 percent of the global oil trade.
The political backdrop to the Iranian sanctions also intensified with the U.N. nuclear watchdog concerned over unspecified "activities" that might be taking place at Iran's Parchin military facility, Western diplomats said Wednesday.
It was unclear what kind of activities the International Atomic Energy Agency (IAEA) suspected, or whether it thought Iran might be trying to clean the site or conceal something ahead of a possible visit. Diplomats said the agency was monitoring the site via satellite images.
With Israel hinting it could launch a pre-emptive strike on an Iranian nuclear facility, a pro-Iranian militant group, Hezbollah, warned that such an attack would set the Middle East ablaze, possibly drag in the United States and unleash a conflict beyond the Jewish state's control.
"America knows that if there is a war on Iran, this means that the whole region will be set alight, with no limit to the fires," Hezbollah deputy Sheikh Naim Qassem told Reuters.
The United States and Israel have not ruled out a military strike on Iran to halt its nuclear program.
U.S. President Barack Obama, concerned about soaring U.S. gasoline prices, has the ability to selectively ease Iranian sanctions. Obama may waive sanctions for up to 120 days, and every 120 days thereafter, if he determines that it "is in the national security interest of the United States."
Rising petrol prices are a hot issue ahead of the presidential elections, with Republicans seeking to tap into voter anger about prices to criticize Obama and his Democratic party's energy policy.
The sanctions aim to cut funds to Iran's nuclear program by slashing its oil revenues. Iran says the program is for peaceful purposes and denies it is trying to build nuclear weapons.
A string of oil outages in Yemen, Syria, South Sudan, and the North Sea have added to supply worries.
Fortunately for oil consumers, Saudi Arabia, home to the world's biggest spare oil cushion, has also boosted production in the last two months.
The kingdom produced an average of 9.7 million bpd over the last two months, according to Wednesday's EIA report, about 100,000 bpd less than a Reuters survey said Wednesday. The EIA figure is up about 600,000 bpd from the same period last year.
Reporting by Timothy Gardner, Rachelle Younglai, Ayesha Rascoe; Writing by Mark Bendeich; Editing by Michael Perry