| LONDON/NEW YORK
LONDON/NEW YORK Oil prices jumped on Wednesday after OPEC failed to reach a deal to increase output, raising fears of supply shortages later this year that could fuel a further price rally, imperiling the economic recovery.
After several hours, the Organization of the Petroleum Exporting Countries' talks broke down as Saudi Arabia failed to convince other members to lift production, as had been expected since last week. However, further gains in the oil prices were limited by expectations that the world's top exporter would unilaterally boost output anyway.
In Vienna, OPEC officials said they hoped the group would meet again in three months time after what Saudi Oil Minister Ali al-Naimi described as "one of the worst meetings...ever".
"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.
"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.
Crude fell from earlier highs after a White House spokesman said current oil supply levels are not meeting world demand and that President Barack Obama was keeping open the option of using U.S. strategic oil reserves but that no decision had been made.
London benchmark Brent crude rose $1.25 to $118.03 by 2:43 p.m. EDT, off earlier highs of $118.59.
U.S. light crude settled $1.65 higher at $100.74 a barrel, off earlier highs of $101.89. U.S. gasoline futures weighed on the complex, sliding 0.21 percent.
Prices also felt some pressure immediately after the release of U.S. weekly oil inventory data. A reported 4.8 million barrel drop in crude stocks was offset by a 2.2 million barrel rise in gasoline inventories, bigger than expected and raising concerns about eroding demand in the world's top consumer.
A sizable drop in stocks at the Cushing, Oklahoma, delivery point for the U.S. oil futures contract following a week-long pipeline outage helped support the U.S. crude, narrowing Brent's premium to WTI to around $17 after hitting a record more than $18 earlier.
Oil prices have rallied since the start of the year on the loss of Libyan oil production because of a civil war, and were approaching 2008 peaks before falling by more than 10 percent in early May. They have traded in a narrow range since then.
However, governments in many developed countries say they are still too high and may act as a brake on economic growth.
Oil consuming nations reacted with dismay to OPEC's decision, with the International Energy Agency urging key members to hike production anyway.
After early indications that OPEC would agree a compromise production increase at its most uncertain meeting in years, the producer group split into irreconcilable factions.
Naimi said that Saudi Arabia was committed to supply the oil market with whatever oil it needed, and together with its core Gulf allies the United Arab Emirates, Kuwait and Qatar had proposed an increment of 1.5 million barrels per day over OPEC's current production including Iraq, for overall output of 30.3 million bpd.
He said Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran -- nations that don't have available spare capacity to pump more barrels quickly -- were opposed.
The failure to reach accord doesn't necessarily change the outcome for oil markets. A senior Gulf industry official familiar with Saudi oil policy told Reuters earlier this week that Riyadh plans to pump another 500,000 bpd to reach at least 9.5 million bpd, its highest in three years.
After Wednesday's meeting, a senior delegate told Reuters that Saudi Arabia would step up output beyond May's 9.16 million bpd this month. A Reuters poll had estimated Saudi output at a lower 8.95 million bpd in May.
It does suggest a new fractiousness in a group that has remained relatively cohesive over the past decade, adding to existing strains around the conflict in Libya.
"The split in OPEC doesn't really affect production plans. In the short-run, the Saudis have already said they're going to be increasing output," said Adam Sieminski, head of energy research at Deutsche Bank. "But what it does do is show the mess the decision making process is in."
The shock from Vienna overshadowed U.S. government stock data, which showed the biggest weekly drop in crude inventories in six months as imports fell. Analysts had forecast a tiny 300,000-barrel decline in a Reuters poll, although the big draw jived with industry data released on Tuesday evening.
However, data showing that inventories of gasoline rose 2.21 million barrels to 214.49 million barrels, above the 1-million-barrel build analysts had projected, was the focus.
"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.