Oil prices soar despite Opec pledge to increase output

Opec pledged to increase oil output by two million barrels a day yesterday but that was not enough to calm world markets unnerved by terrorism.

Many traders remained convinced that not enough oil was being pumped to meet demand at a time of extreme instability in the Middle East region.

Members of Opec, the oil producers cartel, met yesterday and agreed to raise output immediately by 2 million barrels a day, or 8 per cent, to 26 million barrels, with an additional 500,000 barrels from next month. Despite being the biggest increase in more than six years to the quota set by Opec members, the news failed to cool the high price of oil.

United States crude oil, traded in New York, was up 14 cents at $40.10 (£21.80), staying near the 21-year highs seen earlier this week.

In the United Kingdom, the continuing strength of global oil prices meant that the outlook for petrol prices at garages was for further rises, with a litre of fuel climbing towards 90p.

The news from Opec had been the minimum that world markets had been expecting and fell short of more optimistic scenarios.

Nauman Barakat, of the brokers Refco in New York, said: "The perception in the market is that we've been short-changed. This could wave a red rag to the bulls."

Opec's oil ministers will meet again on 21 July to review the new policy.

Kevin Norrish, an oil market analyst at Barclays Capital in London, said that Opec members were producing more oil than the previous quota allowed, making it unclear whether the new ceiling would bring any extra oil onto the world's markets.

"More oil is certainly needed," said Mr Norrish. "Given the demand-supply situation at the moment, $40 is a reasonable price for oil right now."

He said the high price of oil was driven by very strong demand in the United States and China as well as a lack of refining capacity in America. That meant that stocks of oil were not just being built up ahead of winter when demand is traditionally most acute.

Seth Kleinman, of PFC Energy, a United States consultancy, said that a number of Opec member countries who wanted to keep the price of oil high had deliberately suggested before yesterday's meeting that the organisation would go further than the 2 to 2.5 million barrels that had been officially advocated by Saudi Arabia, the leading member of the organisation.

Some Opec sources had indicated in recent days that all quotas may be lifted. That meant yesterday's two million barrel rise came as a disappointment and kept the oil price high.

Mr Kleinman said that the increased production among Opec member countries made Saudi Arabia, which would not be pumping at full capacity, of even more importance to the price of oil.

"Basically, all of the world's spare capacity is going to be in Saudi Arabia and that is where terrorists have shown that they will target oil infrastructure. It is that risk which puts a premium on the price of oil," Mr Kleinman said.