Opec supply may rise, but refining may be a problem

The Organization of the Petroleum Exporting Countries (Opec) looked likely to put a decision on a second 500,000-bpd supply increase on the backburner after prices fell below the group's $55 threshold on Wednesday last.

Opec President Sheikh Ahmad al-Fahd al-Sabah said the time had not come to raise output, although he continued to consult with members one week after an initial 500,000-bpd output increase failed to curb runaway prices.

A second increase may do little to bring down prices as analysts fear higher production will leave the cartel little spare capacity to deal with unexpected supply outages.

Oil prices have been rising after Wednesday's blast at a gasoline unit in BP's Texas City plant, the third-largest in the United States.

This spurred fears about whether refiners -- already running at maximum capacity -- could meet growing gasoline demand this summer.

"The United States has been running refineries at record rates... and we've been very lucky we haven't had a major problem like this earlier," said Phil Flynn, an analyst at Alaron Trading in Chicago.

"It's a reminder how vulnerable we are," Reuters quoted him as saying.

With the US peak-demand driving season two months away, dealers are starting to worry over motor fuel stockpiles, particularly after last week's deep draw showed demand has not been deterred by record prices at the pump, analysts say.

Gasoline inventories fell 4.1 million barrels last week and are down 3 per cent over two weeks.

They are still 7.5 per cent above last year's levels, but shocks such as BP's refinery blast threaten to sap supplies just when they are needed most.

The blast damaged an isomerization unit that upgrades the quality of gasoline but did not affect other operations at the 470,000-barrel-per-day (bpd) refinery, BP said. At least 14 people were killed.

Despite gains on the refinery news, a resurgent US dollar and a big build in crude inventories kept the oil complex pinned well below recent peaks.

Crude oil stocks rose 4.1 million barrels to 309.3 million barrels last week, their highest level since July 2002, the U.S. Energy Information Administration (EIA) said on Wednesday.

The dollar "" the currency of global oil trade "" hit a six-week high against the yen on Thursday as evidence mounted the Federal Reserve might raise interest rates more aggressively after this week's 25 percentage point increase.

Treasury Secretary John Snow said on Wednesday high oil prices were not sustainable and would not derail the US economy.

"They're not of the sort that... are going to knock us out of the recovery we are in now, but they are certainly unwelcome," Snow said.

Oil has soared more than $10 since the start of the year and is up over 45 per cent from a year ago, with galloping demand from China and the United States stretching global output and refining capacity, as well as attracting vast investment fund flows.