The Paris-based International Energy Agency (IEA) has made an unprecedented call for sanity in global oil markets, warning that current record crude prices are higher than they should be and are causing "economic damage".

Using the catchphrase of the American Federal Reserve chairman, Alan Greenspan, to describe overvalued US stock prices of 1996, the IAE said oil markets were in a state of "irrational exuberance".

As if in reply to the warning, the world's biggest producer, Saudi Arabia, said it is ready to pump up to 1.3 million extra barrels per day of oil into the market to cool prices.

The country's oil minister, Ali Naimi, gave assurances that the country could raise its output of 9.3 million bpd over the past three months to meet any extra demand.

He said Saudi Arabia would act "to avoid any shortage of oil supplies in the world oil market, provide enough oil supply as needed and prevent any soaring prices that may impact the growth of global economies, especially in developing countries".

The cost of US crude hovered just below Tuesday's fresh record of dollars 45.04 a barrel last night - the highest price since oil futures were launched on the New York Mercantile Exchange in 1983.

US crude rose 17 cents to dollars 44.69, while London Brent moved 20 cents higher to dollars 41.48.

The IEA conceded the market is tight but said OPEC production in July, excluding Iraq, was 1.6 million barrels a day above its quota at 27.1 million. It added that OPEC's spare capacity could be as much as 1.2 million barrels a day, while the IEA's strategic stocks "stand at the ready".

The organisation's analyst, David Fyfe, added: "The fundamentals do not justify dollars 45 a barrel. The market is focusing too much on potential supply disruptions rather than actual supply levels. Including Iraq, OPEC production is 29 million barrels a day, above the peak winter demand on the cartel."

But the IEA, a co-operative of OECD member countries, admits demand has been running at faster levels than thought because of updated figures from Asia and the Middle East.

The IEA said revisions to data meant previous figures had underplayed oil demand in the past three years. It yesterday upgraded its consumption estimate by 750,000 barrels a day to 82.2 million. China's burgeoning economy has been a pivotal reason behind the surge in oil prices, as the world's most populous country begins to boost industrial output.