Saudi Arabia has raised oil exports and the United States is considering releasing crude from its strategic reserves as oil prices hit nine-month highs on Friday and concerns deepened over Iran’s nuclear program.

Brent crude surged to over $125 a barrel after the United Nation’s nuclear watchdog issued a report flagging the potential military nature of Iran’s nuclear program, following an aborted U.N. inspection mission to Iran this week.

The report heightened fears of a supply disruption and could stoke worries in Israel, which has threatened Iran with pre-emptive strikes on nuclear sites. That would send shockwaves across the region and almost certainly drive oil prices even higher.

Top oil exporter Saudi Arabia increased exports over in the past week and offered additional crude to its biggest customers to tame runaway prices, industry sources told Reuters on Friday.

U.S. sanctions on Iran’s oil buyers, as well as a European Union oil embargo to begin July 1, have already forced its customers in Europe and Asia to curb purchases from the world’s fifth-largest crude exporter.

The Saudi move comes as the Obama administration studies tapping crude from the Strategic Petroleum Reserve among possible measures to offset any Iranian supply disruptions, according to sources familiar with the discussions.

Treasury Secretary Timothy Geithner told CNBC on Friday there may be a case for using the reserve.

“Obviously Iran can do a lot of damage to the global economy,” Geithner said. “We are working very carefully to try to minimize that risk.”

The fear of tightening supplies, including a threat from Tehran to close the Strait of Hormuz — the main Gulf oil shipping lane — have lifted oil prices 11 percent this year, putting political pressure on President Barack Obama, who is running for re-election in November.

Prices at the U.S. gasoline pump are the highest on record for February. They hit $3.65 a gallon on Friday, up 13 percent from last year, according to AAA. That has raised concern that any oil market disturbance could hoist them well over $4.00 during the U.S. summer driving season — when demand in the world’s largest oil consumer tends to be highest.

The International Monetary Fund has also warned higher oil prices are a rising threat to the global economy.

“It’s clear that Washington is holding its regular fire-drill on $4.00 gasoline. This means going through the laundry-list of policies they could use, including an SPR release,” said Bob McNally, a former White House energy adviser who now runs energy consultant Rapidan Group.

“Iran is the added twist. The odds Washington places on an Israeli attack on Iran are higher than the odds given by the oil markets.”

REAL VS PERCEIVED THREATS

The appetite for a coordinated opening of reserves by the United States and other nations may not be as high as last June, when Western nations which are members of the International Energy Agency agreed to release a total of 60 million barrels of oil in response to supply disruptions from Libya.

Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development, said releasing reserves now would not help dampen oil prices driven up by concerns over geopolitical tensions rather than an actual interruption of crude flows.

“My concern is that the hike in the price today does not derive from a fundamental imbalance of supply and demand,” he said at a Group of 20 meeting in Mexico City.

The comment echoed those of Germany’s Economy Ministry earlier this week, which said the government has no plans to release any of its strategic oil reserves.

“By law, the oil reserves can only be released in the event of a disruption of the oil supplies and there is nothing of the kind at the moment,” the spokeswoman said.

Analysts have noted that the actual supply losses seen this year from Syria, Yemen, Sudan that have heightened market concerns are slight compared to the disruptions from Libya last year that prompted the release of the IEA’s reserves.

While Europe would suffer more directly from the cut off of Iranian crude than the United States, which does not buy oil from Tehran, the knock on effect of a disruption would drive up prices across the globe.

The U.S. SPR has the capacity to hold 727 million barrels, enough to cover US needs for nearly 40 days. The government has tapped the reserve in the past during times of supply disruptions, most recently after Libya’s civil war.

An SPR release during the 1991 Gulf War coincided with a 12 percent fall in U.S. gasoline prices. One in 2005 was followed by a price-drop of 19 percent, while last year’s release coincided with a US pump-price drop of around 6 percent, according to Department of Energy figures.

Factbox on the history of SPR releases:

SAUDI COVER

Saudi Arabia has repeated publicly it would prime its pumps to meet any shortfall in exports from fellow OPEC member Iran.

Industry sources told Reuters on Friday the Kingdom had boosted exports to just over 9 million barrels per day last week, compared with an average of about 7.5 million bpd in January, although it was not clear if the export numbers were the start of a longer Saudi supply addition or a temporary uptick.

“Those export numbers are very reliable but they’re only for a week so they don’t tell you whether or not they’re going to sustain these levels,” said one industry source.

If Riyadh were to maintain exports at 9 million bpd it would imply record volumes from OPEC’s leading producer of 11 million bpd, up more than a million bpd from last month. Saudi currently is using about 2 million bpd domestically.

Other sources at oil companies who buy Saudi crude said that Riyadh was offering extra oil both in addition to existing long-term contracts and on a one-off “spot” basis.

Saudi Arabia earlier this year identified $100 a barrel as a fair price and Riyadh is sensitive to the concerns among consumer countries about high fuel prices slowing economic recovery.

As well as extra Saudi oil, Iran’s top European customers are seeking more from Iraq, Libya and Russia, but Saudi Arabia is the only country that holds significant volumes of spare capacity. European Union countries import about 700,000 bpd of Iranian oil.

NUCLEAR DRIVE

Concerns over Iran’s nuclear program reached a fever pitch after the U.N. International Atomic Energy Agency (IAEA) said on Friday Iran had sharply stepped up its uranium enrichment drive.

The IAEA also reported its failed mission to Tehran this week that aimed to get Iran to respond to allegations of research relevant for the development of nuclear weapons — a serious setback to the possible resumption of diplomatic talks.

“The Agency continues to have serious concerns regarding possible military dimensions to Iran’s nuclear program,” the Vienna-based U.N. body said in a quarterly report about Iran issued to its member states.

Israel, which has threatened Iran with pre-emptive strikes on its nuclear sites, had no immediate comment on the report. Germany, which has backed tough new sanctions on Iran, said it was further cause for concern.

Tehran says its nuclear program is exclusively for civilian purposes and denies it aims to make atomic weapons.

Source: Reuters