Opec urged to increase production as IEA warns on low stocks

Oil reserves in the West haven fallen to "uncomfortably low" levels in the run-up to winter, a leading energy think-tank warned yesterday.

The International Energy Agency, which advises 26 countries, hinted that Opec, the cartel of oil producers, should increase output to avert a damaging spike in prices when it meets next week.

"Producers debate whether or not to increase quotas," the IEA said in its monthly oil market report. "The important issue is to recognise that crude stocks are uncomfortably low going into the heating season."

Total oil inventories dropped by 21 million barrels to 2.6 billion in July, a time when stocks are normally built up ahead of strong demand in the winter.

The agency said that the current situation had echoes of 1999 when a shortage of supply coincided with strong economic growth sent oil prices spiralling up.

"In 1999, stocks plummeted, paving the way for high oil prices and extreme volatility in 2000. Today's situation is every bit as precarious," the rep- ort said.

The IEA forecasts that demand for oil will surge fivefold to 1.1 million barrels a day next year on the back of a global economic recovery.

Spot oil prices, which have risen by 50 per cent so far this year, rose after the IEA report. Crude oil for October delivery was up 7 cents at $29.80 a barrel in New York, having touched $30 on Tuesday.

The IEA report comes a day after the head of the world's fourth-largest advertising group, Publicis, warned that oil prices would double if war broke out with Iraq.

Meanwhile, the US economy has slowed in recent weeks, according to the regional report from US Federal Reserve banks, which was prepared ahead of the Fed's decision on interest rates later this month.

Its Beige Book said growth was "slow or uneven" in most regions, while manufacturing activity was "sluggish" and there were little or no sign of gains in employment.

The Fed meets to set rates on 24 September. Last month it changed its outlook, saying risks to the recovery were weighted toward additional weakness.

Analysts said the markets were more focused on testimony to US Congress by Alan Greenspan, the Fed chairman, later today.

"The report is unlikely to cause a significant reassessment of the economic risks at the Fed," said one.