London, UK (FT.com): Saudi Arabia said on Friday that it was increasing its oil production to its highest level in two years, bowing to intense US pressure after the price surged to a fresh record of almost $128 a ­barrel.

The announcement of a boost to output by about 300,000 barrels a day came after a plea by US President George W. Bush to King Abdullah of Saudi Arabia in Riyadh.

The kingdom’s oil output would hit 9.45m b/d by June, Ali Naimi, the country’s oil minister, said after the meeting. Saudi Arabia last produced at that level in March 2006. It said the move was needed to compensate for lower output from other countries in Opec.

The jump in oil prices came after an extremely bullish forecast by Goldman Sachs and fears that China will need to step up fuel consumption after this week’s earthquake damaged its hydro-electric power plants, forcing the country to rely on thermal power.

Demand growth is already faltering, particularly in the US, but remains strong in Asia and the Middle East, regions where governments subsidise the price of fuel.

Goldman - one of the most influential voices in the oil market - forecast that prices would average $141 a barrel in the second half of the year.

US crude oil futures hit a record high of $127.82 a barrel, up nearly $3.70 on the day. But the Saudi announcement immediately sent the price lower and it settled at $126.29 a barrel.

The surge in prices had earlier caused the first fissures within Opec as Ecuador, the group’s newest member and smallest producer, broke ranks and said it would push for a rise in output.

Galo Chiriboga, Ecuador’s oil minister, said an increase was necessary to help poor countries struggling to cope with record prices. Analysts said it was likely that Kuwait and United Arab Emirates would also raise output.

The move came as Mr Bush faced intense political pressure at home to provide relief from soaring petrol prices ahead of the summer driving season, but he received little credit for the Saudi announcement on Friday.

Riyadh pointedly waited until Mr Bush had left the meeting before it made the announcement - leaving US officials in the embarrassing position of having already briefed reporters not to expect any move from?the Saudis.

Energy has become one of the most prominent issues in the US presidential campaign with all three main candidates promising to reduce US dependence on foreign oil and gas.

Traders said prices could surge ahead of the summer, when petrol consumption rises, if China increased its fuel oil purchases as a consequence of the earthquake.

Adam Sieminski, chief energy economist at Deutsche Bank, said it was “becoming clear the earthquake has damaged as many as 17 dams” in Sichuan province, and warned that China might buy more oil to compensate for lower hydro-electric power generation.

Copyright The Financial Times Limited 2008

Editor’s Note: Gee - increase output and the price futures begin to fall. That’s a surprise huh?