ORAN, Algeria (Reuters) - OPEC oil ministers agreed their deepest output cut ever on Wednesday, cutting 2.2 million barrels per day from oil markets in a race to balance supply with rapidly crumbling demand for fuel.

The 12 members of the Organization of the Petroleum Exporting Countries were also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel.

The cut, effective January 1, comes atop existing curbs of 2 million bpd agreed by OPEC since September. It lowers the supply target for the 11 members bound by output limits to 24.845 million bpd -- down nearly 15 percent from September output.

“I hope we surprised you -- if not, we have to do something about it,” said OPEC President Chakib Khelil, host of the conference.

Oil prices fell $3.54 a barrel to $40.06 following the deal after weekly U.S. data showed inventories in the world’s biggest consumer continued to swell.

Washington quickly condemned OPEC’s attempts to end cheaper oil prices. Its cut, the third this year, brings a total reduction in OPEC supply to 4.2 million bpd, taking nearly five percent of world supply off the market.

“OPEC has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted,” said White House spokesman Tony Fratto.

A deepening recession is threatening to shrink world demand for two years running and fuel inventories are bulging. Prices already have plunged by two-thirds since the summer and analysts say the oil market is under the sway of world financial turmoil.

“The world economy is driving the price more than anything OPEC can do at this stage,” said Gary Ross, CEO of consultancy PIRA Energy. “It will be hard for the cuts to have any traction with regard to price in a deteriorating economic environment.”

OPEC’s president said the group would do its utmost to ensure new restraints were strictly enforced.

“I can tell you it’s going to be implemented and it’s going to be implemented very well because we do not have a choice,” said Khelil, also Algeria’s energy minister.

“If not, the situation is going to get worse.”

Saudi Arabia, the world’s biggest oil exporter, has led by example -- reducing supplies to customers even before a cut was agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as “fair.”

Slideshow ( 12 images )

“The purpose of the cut is to bring the market into balance and avoid the gyrations of the price,” said Saudi Oil Minister Ali al-Naimi. “The cut may lead to higher prices or may not.”

FEELING THE PAIN

Oil below $50 is uncomfortable for all producing nations, but especially for OPEC members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programs.

Slideshow ( 12 images )

OPEC hopes that a sharp supply cut will set oil on the path toward $75 -- a level the group believes is needed to encourage investment in future supply.

“You must understand the purpose of the $75 price is for a much more noble cause,” the Saudi Oil Minister said. “You need every producer to produce and marginal producers cannot produce at $40 a barrel.”

The influential Saudi Oil Minister clearly outlined the kingdom’s route to lower production.

It is pumping 8.2 million bpd against 9.7 million bpd in August. Saudi Arabia’s implied output target is about 8.477 million bpd under existing OPEC curbs.

To have a lasting price impact, any OPEC deal must to be strictly observed.

According to independent observers cited in OPEC’s monthly report on Tuesday, the group’s compliance in November to existing cuts was only just over 50 percent.

OPEC has encouraged other producers to cut back too. Russia and Azerbaijan attended the Oran meeting as observers and have said they could rein in exports in future, but stopped short of am immediate pledge.

Leading a high level delegation, Russia’s Deputy Prime Minister Igor Sechin said in a speech to OPEC that Moscow did not plan to join in coordinated output cuts and did not want to join the group in the foreseable future.