OPEC Gets Another Supply Headache From Brazilian Exports

Brazil’s most crippling recession on record is complicating life for OPEC. The nation’s growing oil production combined with slumping domestic demand has unleashed record exports, undermining OPEC’s efforts to reverse falling prices through output cuts.

Brazil hit a daily production record of 1.5 million barrels earlier this year, 26% more than the previous record set in 2010. Average exports surged 39% in the first four months of 2017 from the previous year, Bloomberg reported. State-controlled Petroleo Brasileiro SA, the country’s dominant producer and the source of half its crude exports, expects to end 2017 with 30% growth in international sales.

As a result, Brazil is expected to be the second-biggest source of non-OPEC supply in the second half of the year, OPEC said in its June oil market report.

“Brazil becoming a relevant exporter is complicating OPEC’s efforts to control prices through supply cuts,” former oil regulator Helder Queiroz, a scholar at Rio de Janeiro Federal University, said by phone.

The export growth helps the country strengthen its trade balance and provides some relief amid the nation’s worst recession in a century. Producers are free to pump and export crude at will in Brazil, unlike OPEC countries where governments set output limits, according to Aurelio Amaral, a director at oil regulator ANP.

 “This is up for the companies to decide; the market is not regulated,” Amaral said in an interview.

Recession is part of the explanation, as lower fuel consumption frees oil for exports. Crude demand resumed a declining trend in Brazil during April, shedding 130,000 barrels a day, or around 5.7% of total consumption.

But the economic crisis is not the only reason. Offshore fields in the so-called pre-salt region, discovered a decade ago, are now driving growth. And the oil is more valuable than what Brazil has historically produced at fields closer to shore where the sulfur content is higher, the company said.

Crude exports have remained above a million barrels a day for four months, a monthly level only reached once before back in 2010, according to the most recent data from the National Petroleum Agency, or ANP.