Oil edges lower as Saudi readies new output boost

SINGAPORE (Reuters) - Oil prices eased further below $135 a barrel on Monday as Saudi Arabia prepared to push production to its highest rate in decades to help keep pace with demand and tame what it sees as unacceptably high prices.

U.S. light, sweet crude for July delivery, which had dropped nearly $2 on Friday on a report suggesting a new increase in Saudi output next month, slipped 36 cents to $134.50 a barrel by 2239 GMT, a less than 0.3 percent decline.

At the weekend, United Nations chief Ban Ki-moon said the world's biggest exporter was set to increase output to 9.7 million barrels per day in July, the first official indication of its second supply boost in as many months.

"9.7, that is what he (Saudi Oil Minister Ali al-Naimi) said" on July output, the Abu Dhabi-based The National newspaper quoted the UN Secretary General as saying after he met with Naimi.

That would be a rise of 550,000 bpd or over 6 percent since May and would take Saudi crude output to its highest monthly rate since August 1981, according to U.S. government data.

Saudi King Abdullah "sees that oil prices are currently abnormally high and he is willing to do all that is possible to bring prices to their appropriate levels," state news agency SPA quoted Ban as saying after meeting the Saudi monarch.

The Saudi plan comes to light a week before the kingdom hosts an unprecedented meeting of producers and consumers to tackle market instability, its latest effort to turn back a rally that has boosted prices 40 percent this year alone, spurring protests around the world and endangering global economic growth. But more Saudi oil may not be enough to temper prices. Many refiners in Asia say they don't want more of the kingdom's hard-to-refine heavy crude due to poor profit margins.

"If they want to put pressure on prices they need substantial price discounts that would encourage greater stock building," said David Kirsch of Washington-based consultancy PFC Energy.

Saudi Arabia had pledged a month ago to increase supply by 300,000 bpd this month versus May to meet demand from buyers, primarily in the United States.

Oil had fallen nearly $2 a barrel on Friday after industry newsletter the Middle East Economic Survey reported Riyadh was considering a sizeable output increase to near 10 million bpd.

But prices are still double what they were a year ago and have surged six-fold since 2002 as supply struggles to keep pace with booming demand in Asia and elsewhere, and the falling U.S. dollar pushes investors into the commodities complex.

U.S. Treasury Secretary Henry Paulson warned on Saturday that oil's rally could prolong the U.S. economic downturn.

Saudi Arabia is the only member of OPEC with the spare capacity to boost supplies quickly and significantly. It could pump around 2 million bpd more than it does.

(Reporting by Jonathan Leff; Editing by Jonathan Standing)