The Energy Information Administration report, required every 60 days by the Iran sanctions law President Barack Obama signed in December, gave a mostly positive assessment of global oil supplies, which typically build at this time of year.
World oil and motor fuel supplies exceeded demand by 500,000 barrels per day in March and April, the EIA said, allowing consumer countries to build cushions against any potential losses from U.S. and EU measures against Tehran.
Inventories were helped by strong production from Saudi Arabia, which pumped 9.8 million barrels per day, about 900,000 bpd more than it did in March and April a year ago, it said.
The report provides that comfort level that (the administration) can continue toward implementation of the sanctions without fear that the market is poised to go crazy for them, said David Pumphrey, fellow at Center for Strategic and International Studies and former Energy Department official.
The sanctions aim to choke funding to Tehran's nuclear program by slowing transactions between oil-consuming countries and the Central Bank of Iran. The West contends Iran is trying to build a nuclear weapon, while Tehran says the program is strictly for civilian purposes.
POTENTIAL SPR TAP
The supply picture was not entirely sunny.
The report said Iranian oil output has already been hit by sanctions, and that several non-OPEC crude disruptions worsened in March and April. The disruptions add to worries the global oil market could tighten as - outside of Saudi Arabia - it lacks significant production capacity. They also support the possibility the administration could tap emergency oil stock piles to cool down high fuel prices.
Republicans have slammed Obama over high gasoline prices that have hurt consumers as they struggle with a fragile economic recovery ahead of the November 6 election.
The U.S. sanctions and a pending EU embargo on Iranian oil have already trimmed the OPEC member's oil output by 400,000 barrels per day compared with a year ago, the report said.
EIA believes that Iran's total liquids production capability has been declining due to its inability to carry out investment projects, necessary to offset natural oil well decline rates, it said.
In addition, Canadian oil supply problems and ongoing disruptions from Sudan, South Sudan, Syria, and Yemen compounded worries that petroleum markets could tighten ahead of the June 28 deadline, when Obama is allowed to sanction foreign banks over oil-related transactions with the Central Bank of Iran.
But the White House is unlikely to slow the process ahead of talks in Iraq late next month between Iran and six major powers to settle the nuclear dispute, backers of the sanctions said.
The last thing the administration would do ahead of Baghdad talks would be to show any sign that they are not full steam ahead on oil market sanctions, said Mark Dubowitz, the head of the Foundation for Defense of Democracies, a lobbying group for tough Iran sanctions.
The administration has said it is considering all options to combat high gasoline prices, including a release of crude from the U.S. Strategic Petroleum Reserve.
Nothing in today's report undercuts the administration's stated motivations for drawing reserves, said Kevin Book, an analyst at ClearView Energy Partners in Washington.
(Reporting also by Ayesha Racoe. Editing by M.D. Golan and Bernadette Baum)