Oil closed at a record high over $78 on Tuesday after an OPEC deal to ramp up production failed to calm concerns about thinning world inventories.
The producer group, which supplies more than a third of the world's oil, struck a deal to add 500,000 barrels per day (bpd) starting November 1 to markets concerned about a potential shortfall in the fourth quarter.
It looks like it's going to apply some upward pressure to (crude prices) again because earlier this morning there were some rumors that they would increase it to 700,000 bpd to 1 million bpd, said Jim Ritterbusch, president of Ritterbusch & Associates. This 500,000 bpd appears to be a token gesture.
U.S. light crude settled 74 cents higher at $78.23, the highest close ever and near the all-time intraday high of $78.77 hit on August 1. London Brent crude gained 90 cents to trade at $76.38.
OPEC officials said the agreement would add oil to current production levels, which are around 1 million bpd over their current 25.8 million bpd quota ceiling.
Our message to the consumer is that we care and that is why we have raised our production by 500,000 bpd, OPEC Secretary-General Abdullah al-Badri told a news conference.
The cartel agreed last year to remove 1.7 million bpd of oil from the market, and consumer nations were forecasting crude stocks will fall to the bottom of the five-year range by January unless OPEC increased production.
But concern about the U.S. economy, under pressure from the U.S. subprime loans crisis, has cast doubt over oil demand growth in the world's top consumer.
Given the global credit crunch and the No. 1 consumer on the economic ropes, OPEC's decision is symbolic, said Christopher Jarvis, analyst at Caprock Risk Management.
Before the meeting, Libya, Algeria and Venezuela were inclined to resist the increase proposal put forward by OPEC powerhouse Saudi Arabia and its Gulf Arab neighbors.
OPEC sources told Reuters before the meeting that Saudi Arabia, the United Arab Emirates, Qatar and Kuwait had favored a supply increase of between 500,000 bpd and 1.0 million bpd.
An increase of 500,000 bpd should placate consumer nations without flooding the market and causing a price collapse, according to some experts.
Some OPEC members have insisted there is no shortage of crude in the market and that a lack of refined products is driving up prices.
Oil prices are 27 percent up this year and have tripled since 2002 as investors buy into growing consumer demand, real or potential supply disruptions in producers such as Nigeria and Iran and infrastructure constraints such as a lack of refining capacity.
U.S. crude oil and gasoline stocks during the week to September 7, drained by the summer driving season, were forecast to fall again, a Reuters survey of industry analysts showed.
(Additional reporting by Annika Breidthardt in Singapore and Santosh Menon in London)