NSW surfer Kai Otton won their heat with ten points to Fanning's 9.43 in inconsistent one-metre waves.
The Sydney resident then accounted for current world champion Joel Parkinson in the semis and won his maiden world tour event by beating rookie of the year Nat Young in the final.
The 33-year-old Otton compiled 12.23 points to the young American's 11.03.
It was the first ever final for Otton in his seven years on the elite tour.
"I really want to dedicate it to my Grandad," Otton said.
"He passed away the year I qualified and never saw me on tour so this is for him.
"It seems like this event was a little bit of a grind, every heat the tide changed so dramatically you never really knew what was going to happen."
Fanning, 32, needed to make the semis to accumulate sufficient points to take the crown before the season-ending event in Hawaii in December hk company incorporation.
His nearest challenger, 11-time champion Kelly Slater, was eliminated in the second round at Peniche but can still take the title with a win at the Pipeline Masters.
But the American would need Fanning to again be beaten before the semi-finals to overtake the Australian's points lead.
"It's a bit frustrating, obviously I just wanted to surf and unfortunately it didn't really happen," Fanning said of the lack of waves in his quarter final.
"I'm stoked that I made some points here, it puts me in a better position going into Pipe and I'm excited to go to Hawaii.
"I'll do the whole triple crown so this could be fun!"
The poor conditions left Slater frustrated earlier in the week as he bowed out equal 25th.
"I'm just having trouble being very inspired by the surf in the last three events. My performance probably shows that," he said at the time.
"After 20 years custom embroidered patches, it's hard to really care when it's like this."
Barrelling Pipeline will be a different proposition in a scenario similar to last year when Slater and Parkinson battled it out at the famed Hawaiian reef.