New York's light sweet crude contract for delivery in July jumped past $42 for the first time ever, trading as high as $42.38.

In London, the price of benchmark Brent North Sea crude oil for July delivery soared by $2.50 to $39.08 in closing trade.

Prices rose higher after 22 people, including 19 foreigners, were killed in attacks on oil company offices and a housing complex in the eastern Saudi city of Khobar.

"The market is in a panicking psychological mood," said analyst Mike Fitzpatrick at Fimat USA.

Saudi attack effect

The attack in Saudi Arabia was damaging, he said, even if no oil infrastructure was damaged, because "it sends a psychological message, especially for workers".

"Unlike price spikes in the 70s, or when Kuwait was invaded, the price of oil is increasing at a steady pace"

Jason Schenker,
Wachovia analyst

Fitzpatrick added that if foreign oil workers start to leave the kingdom, "it will be a big problem".

Saudi Arabia, by far the largest producer within 11-member Organisation of Petroleum Exporting Countries (OPEC), says it is currently producing nine million barrels a day. It also has the largest spare production capacity within the grouping.

The price surge came despite expectations that OPEC producers meeting in Beirut this week will agree to raise the cartel's output quota of 23.5 million barrels per day (bpd) in response to record high prices.

OPEC has reached "near consensus" to raise its crude oil production, Qatari Energy Minister Abd Allah Bin Hamad al-Attiya told AFP in the Lebanese capital ahead of the cartel's formal meeting on Thursday.

'OPEC doing all it can'

He said OPEC would do "everything it can" to calm the market.

Saudi Oil Minister Ali al-Naimi told reporters on his arrival in Beirut: "OPEC will do its best to make the fundamentals right."

OPEC officials are meeting in
Beirut this week

US Secretary of State Colin Powell said he was confident that Saudi Arabia was able to boost production to help supply market needs.

"I have confidence in the ability of the Saudi Arabians to continue to provide a secure flow of oil products from Saudi Arabia," he said.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia called on OPEC members late on Tuesday to take coordinated action to lower oil prices.

Such action would be "welcome and beneficial for the euro area and EU economies," Almunia said.

Political lobbying

And Britain's Chancellor of the Exchequer Gordon Brown also weighed into the debate saying he made calls to oil ministers of every OPEC nation in an attempt to persuade the cartel to boost oil production and thus bring down sky-high prices, according to The Times newspaper.

"I have confidence in
the ability of the Saudi Arabians to continue to provide a secure flow
of oil products from
Saudi Arabia"

Colin Powell,
US Secretary of State

Some analysts remain sceptical that any hike in production will have an effect on dampening oil prices, as high demand for petrol from US motorists, combined with geopolitical fears about the situation in the Middle East, will keep prices pressured for the near term.

"Unlike price spikes in the 70s, or when Kuwait was invaded, the price of oil is increasing at a steady pace," said Wachovia analyst Jason Schenker.

"Since there is no erratic spike in price, it is highly improbable that there would be an immediate downward shot in price to a level that would be sustainable. Even if the price fell in the short term because of a decrease in the risk premium or increased supply, the long term prognosis calls for an increase in prices."

US petrol prices, which are a sensitive issue as the holiday season kicks off, are unlikely to see much relief soon, Schenker added.

"An increase in flow of oil into the US may not necessarily drive gas prices down immediately, since it will take some time to process the increased supply of oil with such limited excess capacity," he noted.