Oil price near new high of $140 despite Saudi pledge on production

The price of oil surged to a record new high yesterday of nearly $140 a barrel. Traders shrugged off a pledge from King Abdullah of Saudi Arabia to increase production as the weak dollar spurred investors to make further moves into crude.

United States crude set a record high of $139.89 a barrel, before settling down 25 cents at $134.61. London Brent crude was up $3.05 at $138.16, before closing 40 cents down at $134.71.

Oil prices had increased as the dollar fell following the publication of weak data from the Federal Reserve on US manufacturing output. The news dampened expectations that the Fed might raise interest rates soon. Global oil prices have doubled since last year and have quadrupled since 2003. A decade ago, it cost $10 a barrel.

The price had eased a little earlier in the day following the announcement of plans by the Saudis to increase oil production next month. At a summit with the United Nations secretary general, Ban Ki-moon, the world's biggest oil exporter said it would raise output by 200,000 barrels per day, taking the daily total to 9.7 million barrels – the kingdom's second supply boost in as many months.

If implemented, that would represent a boost of 550,000 barrels per day, or more than 6 per cent since May, and would take Saudi output to its highest monthly rate since August 1981.

Many analysts took the Saudi move as evidence that other Opec members would follow its lead. Iraq, suffering from notorious problems due to instability, has recently managed to increase supply. Non-Opec Angola has also become an important player in the market. However, Saudi Arabia is the only producer with the spare capacity to boost supplies quickly and significantly. It could pump about 2 million barrels per day more than it does.

Opec members supply 40 per cent of the world's oil and, despite claims from some Western politicians, have done much to raise output. Production has increased by 11 per cent since 2002, with Opec responsible for much of this, providing the market with 25 per cent more oil in 2007 on the level prevailing in 2002.

In any case, the decision to increase output represents a partial U-turn for the Saudis, who have previously insisted the recent jump in oil prices is exclusively down to speculation and the policies of Western governments. King Abdullah and Gordon Brown will jointly launch a summit of oil producers and consumers next Sunday in Jeddah, aimed at calming the markets. The soaring cost of oil has made its presence felt in every Western economy. Inflation in the eurozone surged last month to 3.7 per cent, in revised figures issued yesterday by Eurostat, the EU statistical agency. The move follows higher-than-expected price rises in several of the 15 eurozone nations, including Germany and France.

The annual rate is the highest since the data was collected on a single currency basis in 1997, and, adjusted for the various predecessor currencies, it is the highest inflation since 1992. The news firmed a growing market belief that the European Central Bank Council will raise interest rates at its meeting on 3 July, probably by a quarter percentage point, from 4 to 4.25 per cent. The euro rose against other currencies.

Eurozone growth has been surprisingly strong in recent months, and inflation in the currency area would have been even higher had it not been for the recent strength of the euro, especially against the dollar. These pressures, and hints from the ECB president, Jean-Claude Trichet, have led the markets to their hawkish view on rates. Meanwhile, the UK consumer inflation rate is set to exceed 3.1 per cent today – the cue for the Bank of England Governor, Mervyn King, to write a letter of explanation to the Chancellor, Alistair Darling. Inflation jumped unexpectedly from 2.5 to 3.0 per cent in April.

Rising fuel prices, in particular, will probably leave Mr King with no alternative but to reach for the headed notepaper today. The Bank has indicated that inflation will not return to its official 2 per cent target before 2011.