Oil hits record near $128

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U.S. crude settled up $2.17 at $126.29 a barrel after touching a peak of $127.82 earlier in the day. London Brent rose $2.36 to $124.99.

Oil prices have risen six-fold since 2002 and doubled since last year as rising demand from China and other developing nations cinched spare production capacity, adding pressure on the U.S. economy already hard hit by a housing slump.

Goldman Sachs, the most active investment bank in energy markets, said Friday that oil prices will average $141 a barrel in the second half of this year due to paper-thin inventories - a prediction that would require a rapid run-up in current prices to come true.

"I would say the bigger story today is that Goldman upped their target on average oil prices for the back half of the year," said David Katz of Matrix Asset Advisors.

Goldman earlier this month predicted that oil prices could scale $200 within the next two years.

Under pressure from consumer nations hard-hit by the rally, OPEC kingpin Saudi Arabia said Friday it agreed to boost output by 3.3 percent, or 300,000 barrels per day, to loosen up the market and make up for declines in other OPEC nations.

The announcement came as U.S. President George W. Bush visited Riyadh for the second time this year to appeal for more oil to ease pressure on the U.S. economy already slowed by a housing slump and credit crisis.

"In effect they are trying to help President Bush, but in reality they are not increasing the OPEC total because they are compensating for shortfalls," said Nauman Barakat, senior vice president at Macquarie Futures USA.

OPEC's smallest producer, Ecuador, said on Friday that members should consider raising output to stem the oil rally because high prices are hurting the poor.

"I think OPEC has to deal with this issue, because this is hitting all the poorest countries that are oil importers," Ecuador President Rafael Correa told Reuters in the Peruvian capital of Lima.

The Organization of the Petroleum Exporting Countries (OPEC) had previously rebuffed calls for more supply during oil's recent climb.

Diesel has taken centre stage in the world energy crunch as tight power supplies in China, South Africa, Chile, Argentina and parts of the Middle East triggered a boom in demand for middle distillates for electric generators.

Chinese demand for imported diesel is expected to rise even further in June after this week's deadly earthquake disrupted gas supplies to major cities and as companies built stockpiles ahead of the summer Olympics.

Weakness in the U.S. dollar encouraged oil's gains Friday, analysts said.

(Additional reporting by Santosh Menon and Alex Lawler in London, Felicia Loo in Singapore; Editing by Christian Wiessner)