OPEC Cuts Thwarted as Brazil, Russia Grab U.S. Market (Update4)

April 14 (Bloomberg) -- As OPEC nations make their biggest oil production cuts on record, Brazil, Russia and the U.S. are pumping more, threatening to send crude back below $50 a barrel as demand slows.

U.S. imports from the Organization of Petroleum Exporting Countries fell 818,000 barrels a day, or 14 percent, to 5.02 million in January from a year earlier, according to the latest monthly report from the Energy Department. At the same time, imports from Brazil more than doubled to 397,000 and Russia’s increased almost 10-fold to 157,000, a trend that continued in February and March, according to data from each country.

While the median forecast in a Bloomberg News survey of 32 analysts shows crude in New York averaging $61 a barrel in the fourth quarter, up from the second-quarter’s estimate of $50, traders are increasing bets on a decline. The fastest-growing options contract on the New York Mercantile Exchange is for prices to fall below $40 a barrel by May 14.

“OPEC has done a good job keeping oil in the $50 area, but they will have to cut substantially more, maybe more than they are capable of, if they want higher prices,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. “You are going to hear greater calls for non-OPEC producers to cooperate and make cuts.”

Imports fell by 148,000 barrels a day in January just as America’s production increased by 153,000, according to data compiled by the Energy Department in Washington. More oil is flowing just as the slowing economy causes consumption to contract for the second consecutive year.

U.S. Consumption

The U.S. used an average of 18.9 million barrels a day in the four weeks ended April 3, down 4.4 percent from a year earlier, according to the Energy Department, the lowest level since October. Gross domestic product will contract by 3.8 percent in North America in 2009, the International Energy Agency said in a report April 10, dropping an earlier forecast for a recovery in the economy and oil demand in the second half of the year.

Inventories climbed 1.65 million barrels in the week ended April 3, the highest since July 1993, U.S. government data show. Supplies are 12 percent above the five-year average for the period and are the equivalent of 25.4 days of consumption, up from 22.1 days a year ago.

Open interest, or the number of outstanding contracts, on the June put option for oil to fall to $40 a barrel rose by 20 percent to 24,503 contracts in the five trading days from April 3 to April 9. A so-called put gives the owner the option to sell commodities at a predetermined price in the future. Bets that crude will drop to $45 rose by 13 percent.

Crude Futures

Crude oil futures for May delivery fell 64 cents, or 1.3 percent, to settle at $49.41 a barrel today on the Nymex. Oil is up 11 percent this year after tumbling 54 percent in 2008.

OPEC agreed at three meetings last year to cut output by 4.2 million barrels a day, a 14 percent reduction to 24.845 million, as prices fell from a record $147.27 on July 11. The group reduced pumping by 1.2 percent in March, according to a Bloomberg News survey of oil companies, producers and analysts. The 11 members with quotas produced 25.06 million barrels.

As shipments declined, deliveries from exporters that aren’t in OPEC rose by 670,000 barrels a day in January. Russian overall exports climbed 6.3 percent in February and 2.2 percent in March, according to the Energy Ministry. Brazilian total exports more than doubled in both February and March, according to Brazil’s Trade Ministry.

Russian Cooperation

Algerian Oil Minister Chakib Khelil, who held the group’s rotating presidency in 2008, said March 17 that he was disappointed Russia hadn’t cut production to support prices. Suppliers need prices in a $60-to-$75 range to support production of higher-cost resources, Saudi Arabian Oil Minister Ali al-Naimi said on March 16 in Geneva.

Russia also lowered export duties this month to $15 a barrel from $15.70 in March to boost exports, the IEA said in the April 10 report. Brazilian production will rise 7.2 percent in 2009 to 2.54 million barrels a day, the IEA said.

“They want to capture as much of the U.S. market as they can, as fast as they can,” Robert Ebel, chairman of the energy and national security program at the Center for Strategic and International Studies in Washington, said of the non-OPEC producers. “As long as they can make some money at it, they will ship their oil here.”

In January, Russia and Brazil earned $23.2 million a day in exports to the U.S., based on the $41.92 a barrel average on the Nymex that month.

U.S. Market

“Russia has been trying get a foothold in our market for a long time,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “With both gas and oil Russia hopes to gain geopolitical leverage.”

Petroleo Brasileiro SA, the state-controlled energy company, said in January that it plans to invest $174.4 billion through 2013 to boost production oil and gas production to the equivalent of 4.63 million barrels a day by 2015 from 2.40 million in 2008.

“Brazil is interesting both in the near term and long term,” said Rachel Ziemba, an analyst at RGE Monitor, an economic research company in New York. “In the near term there’s been a lot of production brought online. In the longer term Petrobras has one of the most aggressive investment programs in the industry.”

Canceling Projects

Lower prices will hamper development of new sources. Total SA, Europe’s third-largest oil company, said April 6 it may postpone an investment decision in Canadian oil sands because of costs. Chevron Corp., the world’s fourth-largest energy company, delayed the start of production at three Nigerian projects and more than doubled cost estimates on some of its biggest new finds. Drilling and equipment costs remain near their 2008 peaks even as prices plunged.

The U.S. will import an average 4.57 million barrels a day from OPEC in 2009, down 7.5 percent from last year, according to the Energy Department’s Annual Energy Outlook. Total imports are forecast to drop 7.3 percent this year to an average 9.02 million barrels a day.

“This is a reallocation of supply,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “The U.S. is a far off point for most of OPEC to deliver to. It’s natural that with OPEC cutting back dramatically you are going to see non-OPEC pick up some market share.”