Saudi Arabia has disclosed, during a visit to the Kingdom by George Bush, that it has lifted oil production to its highest in two years.

But the agreement to pump an extra 300,000 barrels per day did little to relieve runaway oil prices, which had earlier struck a record high of nearly $128 a barrel.

The price of a barrel of US crude hit an all-time peak of $127.82 while London Brent rose $2.36 to $124.99.

The announcement from Saudi Arabia, the world's largest producer, to increase supplies by 3.3 per cent to 9.45 million barrels per day came during the second trip made by President Bush this year to visit King Abdullah in Riyadh.

Saudi Oil Minister Ali al-Naimi said: "On May 10, we raised supplies to customers by increasing 300,000 barrels per day of oil (output) ... In the future if the need appears, Saudi Arabia has no objection to producing more."

He said most of the extra supplies would go to the US, the world’s largest oil consumer.

The picture was, however, muddied by warnings from the Kingdom that future rises in production would only come about in response to customer demand.

Naimi also warned the increase would not lead to a significant fall in prices paid at the pump in the US.

News of an increase in Saudi oil production came as the US said it would stop shipments to its strategic oil reserve for the second half of the year after Congress passed a bill calling for a suspension.

The US Energy Department announced it had not signed a six-month contract for deliveries to the US Strategic Petroleum Reserve (SPR), the world’s largest stockpile of government-owned emergency crude oil.

The decision affects up to 13 million barrels of crude.

US officials are concerned about the impact the oil price, which has doubled since last year, is having on the US economy, which is already under pressure from a sliding housing market and the credit crisis.

Oil prices have risen six-fold since 2002 amid booming demand from China and other developing economies, as well as constraints in global production capacity.

Other big producers including Russia and OPEC members Nigeria and Iran are either unwilling or unable to lift production.

While the announcement did prompt a slight easing in the oil price, traders said they were focused on a new price forecast from investment bank Goldman Sachs, which predicted oil prices would average $141 per barrel in the second half of this year because of weak global inventories.

Goldman Sachs is one of the most active investment banks in global energy markets and correctly predicted the current rally as far back as 2005.

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