UPDATE 7-Oil hits record near $128, Saudi raises output

                                
 (Adds details)
                                
 By Richard Valdmanis
                                
 NEW YORK, May 16 (Reuters) - Oil shot to a record high near
$128 a barrel on Friday after Goldman Sachs, the most active
investment bank in energy markets, forecast a continued spike in
prices through the end of the year due to thin supplies.
                                
 Under pressure from consumer nations hard-hit by the rally,
OPEC kingpin Saudi Arabia said Friday it agreed to boost output
by 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
supply to ease pressure on the U.S. economy already slowed by a
housing slump and credit crisis.
                                
 U.S. crude <CLc1> gained $1.87 to $125.99 a barrel by 1700
GMT after touching a peak of $127.82 earlier in the day. London
Brent <LCOc1> rose $2.07 to $124.70.
                                
 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.
                                
 Goldman Sachs raised its forecast for average oil prices for
the second half of 2008 to $141 a barrel from $107 because of
tight 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.
                                
 OPEC's smallest producer, Ecuador, said on Friday that
members should consider raising output because record 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's president, Rafael Correa, told Reuters in the Peruvian
capital, Lima.
                                
 The Organization of the Petroleum Exporting Countries (OPEC)
had previously rebuffed calls for more supply during oil's
recent climb.
                                
 DIESEL CRUNCH
                                
 Diesel has taken center 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.
                                
 "People are looking at diesel. The situation is worse since
the earthquake on Monday in China," said Robert Laughlin, oil
analyst at MF Global.
                                
 The boom in diesel consumption added to already-robust
demand from the European vehicle fleet, thinning inventories on
both sides of the Atlantic.
                                
 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 Matthew Lewis)