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.

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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.

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