Crude is becalmed. Having clawed off its January lows, Ice Brent has been caught at $62.50-70/bl for three months. But the next two weeks pose three challenges to both ends of that range; June could be the most important month for the crude price since December 2008, when Brent bottomed out after its rapid rise to and fall from an all-time high six months earlier.
Today, the US Federal Reserve will conclude its monthly policy meeting. The smoke signals from Washington, DC, suggest that this meeting will not be the one to signal rising rates, but it might be the one to signal when that one will be. The US oil sector will be hanging on the Fed’s every word.
The Fed has kept its benchmark rate near zero since December 2008. That month was the starting point for the inexorable rise in US crude output to the near record levels of today, and much of the additional drilling and production has been financed by borrowing.
Independent upstream firms in North Dakota’s Bakken formation are running with some heavy debt loads; the lower oil price has already reduced cash flows — not only in the shale fields but also in oil sands and deepwater Gulf of Mexico projects — and when lending conditions change there could be a crunch. The Bank of International Settlements (BIS) notes that US oil companies account for around 40pc of syndicated loans and debt securities outstanding. Much of this has been taken on against a backdrop of negative operating cash flow, meaning the oil price is a proxy for the value of the underlying assets that underpin that debt.
This month could also see the end to the Greek debt crisis. The language of negotiation can no longer be described as diplomatic, and the likelihood that the country will default on its sovereign debt is moving from a possibility to a probability. This is creating unprecedented uncertainty across the eurozone and beyond about the sort of economic well-being that underpins demand for crude and refined products.
Greece has a 30 June deadline to meet its obligations to the IMF. The same day, incidentally, as the third challenge to the oil market. That day is also the deadline for a comprehensive Iran deal that could bring extra supply onto the market.