Opec Set to Raise Production

Opec has agreed in principle to boost production in an effort to ease pressure on prices, a senior oil official said today.

As the cartel met in Beirut to discuss raising crude output quotas by up to 2.5m barrels a day, the UAE oil minister, Obaid al-Nasseri told Reuters: "In principle we have an agreement on raising production. I believe that will be between two to 2.5m [barrels]."

Saudi Arabia, Opec's biggest producer and a close ally of the US, is pressing for an increase at the top end of the range, and Kuwait said it expected Riyadh to get sufficient backing to push through a deal on that scale.

"Kuwait thinks [that raising overall Opec production to] 26m will be the right thing to do," said the country's oil minister, Sheikh Ahmad al-Fahd al-Sabah.

But some Opec members want to avoid a repeat of the collapse in oil prices that followed a 1997 decision to raise production just before the Asian financial crisis sharply reduced demand. Iran is proposing a two-stage deal that would bring a maximum increase of 1.5m barrels a day now with the option of more to come at a subsequent meeting later in the summer.

Uncertainty over the size of a deal pushed up US oil prices by 59 cents to $40.5 (£22) a barrel in morning trading. Oil prices have been above $40 - and at a 21-year high - for most of the past three weeks through a combination of economic and political factors.

Strong economic growth in the US and China, a lack of refining capacity in the US and worries about terrorist attacks in Saudi Arabia have pushed prices up by about a quarter since the start of the year. Prices jumped to above $42 at the start of the week after Saturday's raid by suspected al-Qaida militants in the Saudi oil city Khobar that left 22 people dead.

As higher petrol prices become a hot political issue in the US and Britain, Washington and London have put pressure on Opec to raise production. But analysts doubt that any decision in Beirut will take the pressure off prices.

Opec is already producing at least 2.3m barrels a day over its existing formal limits of 23.5m, so that even an agreement to boost production by 2.5m barrels would do little more than ratify current output.

"There appears to be a huge terror premium built into the current price. It remains questionable how much that premium can be reduced in the short-term, given what is likely to be a volatile period ahead of the Iraq sovereignty handover on 30 June," Deutsche Bank said in a briefing note.