Refiners prefer low-sulfur crude, which is easier to process into transport fuels compared with heavy grades from Saudi Arabia. The Middle East country, OPEC's biggest producer, said it will raise output by about 3.3 per cent to 9.45 million barrels a day in June.
Crude oil for June delivery was at $127.20 a barrel, up 15 cents in electronic trading on the New York Mercantile Exchange.
Prices are 92 per cent higher than a year ago. Crude touched $127.82 on May 16, the highest since trading began in 1983. The June contract expires today and the more active July future was at $126.80 a barrel, up 8 cents.
The Saudi announcement followed a meeting between US President George Bush and King Abdullah. The desert kingdom is the world's largest oil exporter and the most influential member of the Organization of Petroleum Exporting Countries.