Despite earlier pledges to hold oil output steady, the Organization of Petroleum Exporting Countries (OPEC) announced early this morning that it would cut production by 520,000 barrels per day in an effort to “strictly comply” with the production quotas set last September.

The cartel, which controls 40% of the world’s oil exports, pointed to such factors as tumbling demand, greater supply, the dollar’s recent rally and an easing of political tensions – all of which have contributed to a 30% drop in oil prices over the past nine weeks.

“All the foregoing indicates a shift in market sentiment causing downside risks to the global oil market outlook,” OPEC said in a statement.

In its monthly report, released today, the International Energy Agency lowered its 2008 forecast by 100,000 barrels to 86.8 million barrels a day, and the 2009 estimate by 140,000 barrels to 87.6 million barrels a day.

Still, the cut in production contrasts sharply with statements made by Saudi Oil Minister Ali al-Naimi prior to the meeting.

“We have worked very hard since June’s meeting to bring prices to where they are now,” al-Naimi told reporters Tuesday. “I think everything is in balance – inventories are in a healthy position.”

Saudi Arabia is responsible for most of the surplus oil production, as the country acted unilaterally to boost its output by 500,000 barrels a day when oil prices soared uncontrollably in the first half of the year. Riyadh was very concerned that prices higher than $100 a barrel could erode demand in many of its most reliable markets, including the United States.

Now, Saudi Arabia will be forced to take most of that extra supply off the market, or else risk undermining the group as a whole and further exasperating crude’s price decline.

“I don’t think this will affect the consumers in any way because, first of all, there’s an oversupply. Everybody agrees on that,” said Chakib Khelil, OPEC president and Algeria’s Energy Minister. “”My hunch is probably the price will still be going down, despite the decision that we made.”

OPEC is pumping approximately 2.18 million barrels a day more than it was in 2007. Saudi Arabia is currently producing about 9.5 million barrels of oil a day, 600,000 barrels a day more than its official OPEC quota.

Oil was trading at $104.02 a barrel on the New York Mercantile Exchange as of 11:00am ET this morning, up just 1% from yesterday’s close.

Source: OPEC Cuts Ouput, Oil Prices Stagnant