Saudi Arabia is leading the Organisation of the Petroleum Exporting Countries to lower prices and pump more oil to compensate for the loss of crude production from the Gulf of Mexico after Hurricane Katrina.

The kingdom, the world's largest oil producer, widened on Monday the discount at which it sells its oil to US and European refineries to a six-month high.

The decision, which represents a U-turn from recent Saudi policy, would encourage demand for the kingdom's oil and could be followed by other Gulf producers, Opec officials and oil traders said.

The move comes ahead of an Opec meeting in two weeks and after the US lost 20 per cent of its oil production and 10 per cent of its refinery capacity.

US oil production in the Gulf of Mexico recovered on Monday to 69.6 per cent of the pre-Katrina level of 1.5m barrels a day. At the peak of the hurricane disruption, output was 95 per cent down. In addition, four of the eight refineries hit by the storm were restarting on Tuesday.

However, three other large refineries owned by ExxonMobil, ConocoPhillips and Chevron, which have a capacity of 750,000 b/d – about 5 per cent of the US total – are still flooded.

"For these plants water damage, particularly in facility control rooms, seems to be the most important obstacle to a restart. Lack of communication from the companies suggests extensive downtime," said Paul Sankey, of Deutsche Bank in New York. "In the past it has taken plants up to eight months to return to full operations," he added.

US oil prices fell on Tuesday by $1.50 to $66 a barrel as the market reacted to the release of the industrial countries' emergency stocks, but analysts said the refinery problems would keep prices high. The market was also worried that oil demand could drop if the global economy slowed because of the oil price jump. That concern is shared by Opec, which could consider at its meeting in Vienna increasing its output ceiling from the current level of 28m b/d.

"Some countries favour an increase [of the quotas] of 500,000 b/d and others talks about 1m b/d," an Opec official said. The 10 Opec members subject to quotas – Iraq is excluded – pumped in July about 28.3m b/d, or 300,000 above its official ceiling. Traders said production was higher last month.

Iran, one of the organisation's hawkish members, has already supported a 500,000 b/d increase. Hossein Kazempour Ardebili, Iranian Opec delegate, said: "Opec members will most probably raise the organisation's oil production ceiling in a bid to stabilise oil markets."

Saudi Arabia is the only Opec member with a significant amount of spare capacity, although the bulk of it is concentrated in low quality oil. The kingdom pumps about 9.5m b/d. Ali Naimi, the Saudi oil minister, offered in the aftermath of the hurricane to raise output to the 11m b/d of maximum capacity.

Some traders cautioned that the big discounts offered by Saudi Arabia were not a surprise and could not translate into higher demand for the kingdom oil. Some of the closed refineries in the Gulf of Mexico specialised in low-quality Saudi oil, which means demand would not rise until they come back on line.