Oil prices surge after Opec leaders draw up plans to reduce output

Oil prices surged yesterday as it emerged that the leading producers had drawn up plans to cut output. Leaders of the Organisation of Petroleum Exporting Countries have grown increasingly concerned by falling crude prices, weakening demand and mounting stockpiles.

Timely evidence of the weakness of the global economy came from a survey yesterday showing German business confidence hitting a five-year low.

Opec leaders said they aimed to meet on 6 August to approve a cut in output to start on 1 September. Ali Rodriguez, the cartel's secretary-general, said: "At the moment we are in consultations and probably we will meet [in Vienna] at the beginning of August." Comments by Opec oil ministers show that the cut could be as much as 1.5 million barrels a day.

Crude oil prices have dropped 11 per cent in the last five weeks amid reports of stockbuilding in the US and worries about global demand. That took the average price monitored by Opec to $22.74 – close to the bottom of its target of $22 to $28. Yesterday US crude rose as much as $1.01, or 4 per cent, to $26.60 a barrel.

But analysts said Opec was in danger of making a mistake by trying to drive up the oil price as the world economy flirted with recession. Lawrence Eagles, at brokers GNI, said: "If the cartel tries to push prices too high now it could stifle the rebound. That would reduce oil [demand] in the year ahead."

Germany appeared to be on the brink of recession yesterday after a key business climate index plunged to its lowest level for five years. Economists said the weak Ifo survey, and separate figures showing a fall in German and Italian inflation, had shortened the odds on a rate cut.

The European Central Bank meets to set rates on 2 August but takes a break from its bi-monthly cycle and will not reassemble until 30 August. It has not changed rates since 10 May.

Gernot Herb, Ifo's chief economist, said there was no indication of a rebound in the German economy. "We see scope for the ECB to lower rates again this year," he said.

City economists, however, forecast that high inflation would prevent the ECB cutting rates before 30 August.

Meanwhile the pound fell after the influential Ernst & Young ITEM Club called for intervention to devalue sterling. It slipped more than 1 per cent against the dollar to below $1.42. The Treasury rejected the plea.

The European single currency, which fell after the US Treasury Secretary Paul O'Neill affirmed the US's strong dollar policy, fell further. The euro slipped to $0.8669 from $0.8723.