LONDON: Oil prices jumped by $2 on Wednesday after OPEC failed to reach a deal to increase output, raising fears of supply shortages later this year and a price rally that could damage global economic recovery.
However, further gains in the oil prices were limited by market expectations that OPEC leader Saudi Arabia would unilaterally boost output ahead of an expected spike in global demand later this year.
"We were unable to reach an agreement -- this is one of the worst meetings we have ever had," Saudi oil minister Ali al-Naimi said after failing to convince other members to lift production.
He added suggestions that the producing group needed to wait another three months before deciding on an output increase was not a good idea because markets needed oil now, effectively signaling that the Saudis could start pumping more crude soon.
By 1452 GMT US light crude was up $1.40 dollars at $100.50, having previously risen by $2, while Brent was up $1.00 at $117.78.
"It came as a surprise. It is bullish for prices. If you look at demand it will be very robust in the next months and there is a big need for extra OPEC oil," said Amrita Sen from Barclays Capital.
But she added that some market players would not read too much into OPEC's failure to reach a deal since the group has been already producing above the agreed quotas and more oil could soon come from Saudi Arabia.
"It will be important to see if the Saudis are willing to supply more, it will matter a lot. Otherwise the market will be very tight," she said.
Sam Ciscuk, Senior Middle East Energy analyst at IHS, said the results of the meeting would serve as a wake up call for the Saudis to boost their diplomatic efforts to sway some key states their way.
"The Saudis have options though; raising production 'to fill in for Libya' or calling a new meeting soon if prices start going up decisively again," he added.
Oil prices have rallied since the start of the year on the outage of Libyan oil production because of a civil war and were approaching 2008 peaks before correcting sharply in May.
However, governments in many developed countries say they are still too high and may act as a brake on economic growth.
A White House adviser said on Wednesday the United States is concerned about the effect of oil prices on the economy and retains all the tools at its disposal to deal with them
Weekly data from the US Energy Information Administration showed US crude oil inventories slumped last week, far more than forecast, while refined product stocks posted unexpected big builds.
Oil prices failed to move significantly on US data.
"The increase in gasoline inventories diminishes the bullish tone somewhat. We are continuing to see rapid replenishment of gasoline storage levels." said John Kilduff, Partner at Again Capital LLC in New York.
Copyright Reuters, 2011
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