The Organisation of the Petroleum Exporting Countries (OPEC) has decided to cut its daily oil production by about 2 million barrels. OPEC's daily output target is 27.3 million barrels.
On of the world top oil exporters, Saudi Arabi has supported Opec's move in a bid to tide over the crisis.
This is the biggest ever cut by OPEC in a bid to balance supply and demand. OPEC accounts for about 35 per cent of the crude oil market.
"The demand for OPEC crude in 2008 is expected to average 31.6 million barrel per day (mb/d), a decline of 0.7 mb/d from the previous year. In 2009, the demand for OPEC crude is expected to average 30.2 mb/d, a drop of 1.4 mb/d from the current year," states an OPEC study.
Non-OPEC members Russia and Azerbaijan have also cut production by 600,000 barrels a day. This would result in a total reduction of 2.6 million barrels.
The growing imbalance in the oil market over the coming quarters will lead to a much higher overhang in inventories, if the global recession deepens, states an OPEC study.
The OPEC members met on Wednesday to chalk out a strategy to check the fall in prices. Oil prices had zoomed to a high of $147 in July.
The oil cartel expects the production cuts would stabilise prices, which have now fallen to a low of $44.
"The year 2008 has been a year of sharp revisions to the world oil demand forecast. The oil demand growth has been slashed from initial estimate of 1.3 million barrel per day (mb/d) to negative growth of about 0.1 mb/d," OPEC says.
The recession in the global economy has been the main driver for the fall in oil demand. Although the recent drop in oil prices should have eased pressure on oil demand, the sharp acceleration of the financial crisis since mid-September and spreading consequences across the globe have more than offset the impact of lower prices on oil demand growth, the OPEC study says.