By Timothy Gardner and Matthew Robinson
WASHINGTON (Reuters) - The Obama administration is unlikely to pull back from levying sanctions against Iran oil transactions based on a government report due on Friday, which is expected to show crude markets are sufficiently well-supplied to move forward with the penalties.
The report, which the U.S. Energy Information Administration is required to produce every two months under the sanctions law aimed at curbing Tehran's nuclear ambitions, could walk a fine line in assessing the state of markets, according to analysts.
Oil markets have relaxed significantly since earlier this year, when prices reached post-2008 records as European and Asian oil customers cut imports from Iran. Top oil exporter Saudi Arabia has increased supplies, as has fellow OPEC producer Libya, while U.S. domestic output continues to grow.
"I think there is pretty broad consensus in the market relative to two months ago that things are loose right now," said Trevor Houser, a partner at Rhodium Group and a former State Department adviser.
However, some analysts expect the report, which should be released at midday on Friday, to maintain a neutral tone, leaving President Barack Obama sufficient room to authorize a release of emergency oil stockpiles to help cool off gasoline prices, which have become a key issue in the presidential race.
Average U.S. gasoline prices have declined in recent weeks, but still remain near $4 a gallon, and the administration has said all options -- including a release of crude from the Strategic Petroleum Reserve -- are on the table to bring relief to consumers and ease the threat of high fuel costs hurting the struggling economy.
"I think the EIA is going to say, 'look: it's still a dangerous world out there despite some builds in stocks,'" said a Washington-based energy consultant and former White House energy adviser, who did not want to be named.
The sanctions aim to choke funding to Tehran's nuclear program by stopping oil transactions with Iran's Central Bank. The West contends Iran is trying to build a nuclear weapon, while Tehran says the program is strictly for civilian purposes.
The EIA may have given a preview of Friday's report earlier this month in a weekly paper that said new global outages have emerged even though some outages in the first two months of the year have eased.
An outage in Iraq caused by a dispute between the Kurdish regional government and Baghdad has pushed production down about 100,000 bpd, and the worsening situation in Sudan has cut output deeper there in the past two months.
In addition, output from Iran could fall 500,000 bpd by the end of the year as the Western sanctions bite, the EIA said in the April 18 This Week in Petroleum report.
"To the degree the administration points to those disruptions, they may seek to justify an SPR draw on the report," the consultant said. "That could be the importance of the report, if they decide to draw down the SPR in the next month or two."
While oil prices remain high -- both international Brent crude and U.S. crude are off about $3 to $120 a barrel and $104 a barrel, respectively -- oil markets are looking better supplied than they did two months ago, especially in the United States.
The International Energy Agency reported earlier this month the oil market had broken a two-year cycle of tightening supplies due to higher output from Saudi Arabia and weak demand growth.
The kingdom, which has said it wants to see international oil prices closer to $100 a barrel, has ramped up shipments to the United States, in part to feed an expansion of its refining joint venture in Texas. U.S. imports of crude from Saudi Arabia are averaging 1.56 million bpd in the first three weeks of April, up about 130,000 bpd from February, according to preliminary weekly data from the EIA.
U.S. crude oil inventories have swelled over the period, up roughly 28 million barrels since late February.
At the same time, a Reuters survey showed total OPEC output rose by 100,000 bpd in March from February, the highest level since October 2008 and giving global markets additional padding, according to a Reuters survey.
Friday's report will likely have little effect on how the administration moves forward with sanctions because Obama already said late last month there was enough oil in the world market to allow countries to cut Iranian imports. [ID:nL2E8EU7UC] Obama is required by the sanctions law to make that determination every six months.
Friday's report is not expected to predict market conditions in coming months when U.S. summer demand kicks in, and Western sanctions cut exports from Iran, which could push prices higher.
"That consensus (on market conditions) break down is three months from now," said Rhodium Group's Houser.
(Editing by Bob Burgdorfer)