Whiskey Tango Foxtrot

[Lyion]

Or in other words WTF.

LONDON (Reuters) - Oil hit a record high above $79 a barrel on Wednesday, propelled by an unexpectedly large drop in U.S. crude oil stocks that coincided with only a small output increase from OPEC ahead of peak winter demand.

U.S. light crude for October delivery set a record high of $79.29 a barrel, beating the previous record of $78.77 reached on August 1.

U.S. crude was 70 cents higher at $78.93 a barrel by 11:30 a.m. EDT. London Brent crude was up 57 cents at $76.95.

Crude oil stocks in top consumer the United States fell 7.1 million barrels last week to their lowest in eight months, according to the U.S. Energy Information Administration.

Analysts had expected a fall of 2.4 million barrels.

"The reality is that the crude tightness in Europe and Asia has begun to affect the U.S. market in a big way," said Antoine Halff, analyst at Fimat Research in New York.

"In retrospect, it validates OPEC's decision to increase production."

OPEC agreed to raise crude output by 500,000 barrels per day (bpd) from November 1 at its meeting in Vienna on Tuesday, in a gesture to consumer nations concerned about the economic impact of high oil prices and rapidly diminishing fuel stocks.

"NOT ENOUGH"

"The OPEC outcome was not enough of a shocker to turn around a market that likes to read extremes," said Olivier Jakob of oil consultancy Petromatrix.

The new output deal from the Organization of the Petroleum Exporting Countries will reverse most of the 1.7 million barrels per day of cuts agreed by the group since October 2006.

The 10 countries bound by that agreement were already pumping almost one million bpd above their nominal ceiling.

"It legitimizes the excess production that was there relative to OPEC's previous implied quota and not much more," said Harry Tchilinguirian, senior oil market analyst at BNP Paribas.

"So, anything short of 1 million barrels a day looking ahead to winter balances would not be enough."

OPEC had to balance consumers' concerns about shrinking stocks of oil ahead of winter with fears of an economic slowdown in top consumer the United States that could dampen oil demand.

OPEC member Iraq is excluded from the production agreement, as is new member Angola.

"We think that OPEC has been somewhat less aggressive in its additional supply decision as it waits to see if Iraq can sustain a 250 thousand barrel per day flow from the north," Jakob said.

The International Energy Agency, which has been urging OPEC to pump more oil, predicted world oil demand will grow more slowly than expected in the last quarter of 2007 and next year.

The IEA's latest monthly report, published on Wednesday, also suggested high prices might further curb consumption.

The agency, adviser to 26 industrialized countries, said it was too early to assess the impact of fallout from the mortgage crisis in the U.S. on its economy.