Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil and Solar Stocks Are Moving in Opposite Directions
Transcript
- Lucas: Crude oil has had a rough week. WTI settled at sixty-nine fifty-seven on Monday, down over three percent in five days. Brent is not far behind, at seventy-three eleven, down nearly three percent. And yet, when you look at the solar ETF, TAN, it's up two percent over the same period. Enphase, the microinverter company, is up over four percent. Luna: That is a striking divergence. A few months ago, clean energy stocks were falling faster than oil. Now they're going in opposite directions. What changed? Lucas: Let's start with what's weighing on oil. The headline number is WTI below seventy, which always grabs attention. But the bigger story might be in the demand picture. We've had a string of factory job cuts and weaker manufacturing PMIs globally. If factories are running less, they consume less diesel, less feedstock. That's a demand-side drag that supply cuts from OPEC plus haven't been able to offset. Luna: And yet gasoline prices at the pump are still above three eighty a gallon. They've come down from three ninety-one a week ago, but they're sticky. That's the consumer side feeling the pinch. Lucas: Right. And that stickiness is part of why the Fed can't declare victory on inflation. The May CPI came in at three thirty-four, up from three thirty-two point four one in April. Core CPI, excluding food and energy, also edged up. So the energy component isn't falling fast enough to pull the overall index down. Luna: But if oil is dropping, why isn't gasoline falling more? That's the classic refinery margin story, isn't it? Lucas: Exactly. Refineries are running at high utilization, but they've been optimizing for diesel and jet fuel, not gasoline. And there are some maintenance outages. So the crude to gasoline pass-through is not one-to-one, especially in the summer driving season when demand is highest. That's why you see the ten-year breakeven inflation rate tick up to two point twenty-two percent — markets are pricing in that energy costs won't fall much further. Luna: So oil is down on demand fears, but consumers aren't feeling the relief yet. Meanwhile, solar stocks are up. That seems counterintuitive if the economy is slowing. Lucas: It is, unless you look at the specific catalysts for clean energy. The big one is AI data centers. AWS just announced a one billion dollar investment in a new AI unit to embed engineers with customers. That's part of a wave. Data centers need enormous amounts of electricity, and they need it 24/7. Utilities and tech companies are signing power purchase agreements for solar and wind, but also for natural gas. The natural gas futures are down one and a half percent this week, but that's after a big run-up. The demand story for power is real. Luna: And that benefits solar installers, inverter makers, even battery storage companies. Enphase being up four percent fits that narrative. But not all clean energy stocks are rallying. First Solar is down almost five percent this week. What's going on there? Lucas: First Solar is a cautionary tale. They make solar panels, and their stock had a huge run earlier this year on the IRA and utility-scale demand. But they also face headwinds: rising polysilicon costs, potential tariffs on imported modules, and some project delays. The market is rewarding companies with direct exposure to the data center buildout — Enphase sells microinverters that are used in commercial and industrial rooftops, which can be paired with battery systems for backup power. First Solar's utility-scale panels go to big solar farms, which are more sensitive to interest rates and transmission bottlenecks. Luna: So the divergence within clean energy is as interesting as the divergence between oil and solar. It's not a blanket rally. Lucas: No, it's selective. And that selectivity tells you something about where investors think the growth is. The ICLN clean energy ETF is only up half a percent. It's a mixed bag. But the fact that TAN is up two percent while XLE, the energy sector ETF, is down half a percent, says that money is rotating out of traditional oil and gas and into certain parts of the energy transition. Luna: I want to push back a little. Chevron is down two and a half percent this week, ConocoPhillips down two point six. Those are big drops. But ExxonMobil is only down half a percent. Why the difference? Lucas: Exxon has a bigger downstream and chemical business, which can buffer when crude prices fall. They also have a growing low-carbon division. Chevron is more leveraged to production, especially in the Permian, and Conoco is pure-play upstream. So when WTI drops below seventy, those stocks take a more direct hit. The XOP, which is the exploration and production ETF, is actually up one point two percent, which is weird. That might be some short-covering or a few small-cap names rallying on takeover speculation. Luna: That's a good reminder that the headline index doesn't tell the whole story. So where does this leave us? Oil is weak on demand, clean energy is strong on ai driven power demand, but within clean energy, it's stock-specific. Lucas: And inflation is still lurking. The PCE price index for May came in at one thirty-one point five, up from one thirty point nine four. Core PCE also ticked up. So the Fed is not going to cut rates anytime soon. That's a headwind for anything that relies on cheap debt, including large solar farms. But for companies that can sign long-term contracts with data center operators, the higher rate environment is manageable because the offtake is guaranteed. Luna: It's almost like we're seeing two different economies. One is the old industrial economy, where oil demand is softening. The other is the new digital economy, where power demand is booming. Lucas: That's a great way to frame it. And the energy markets are caught in between. Natural gas is the bridge fuel that connects both. It's down this week, but the underlying trend is up because data centers need gas-fired power as backup for intermittent renewables. Henry Hub is at three sixteen per million BTU. That's not high historically, but it's up from the twos we saw last year. Luna: If walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it's a small thing that makes a big difference for us. And it keeps the show ad-free, which we like. Luna: Exactly. So back to the divergence. Is this sustainable? Can solar stocks keep rallying if oil keeps sliding? Lucas: I think it can, as long as the data center buildout continues. But if the demand slowdown spreads from manufacturing to the broader economy, then corporate IT spending could get cut, and that would hit the AI capex cycle. For now, though, the signals are mixed. The Dow is having its best first half in five years, and the Nasdaq is set for its best quarter since 2020. So equity markets are optimistic, but energy markets are pessimistic. That tension has to resolve eventually. Luna: And what about geopolitics? We had headlines about the Strait of Hormuz a few weeks ago, but that risk seems to have faded. Oil is down despite the Middle East tension. Lucas: That's the thing. The market is looking past geopolitical risk because the demand picture is so weak. OPEC plus is cutting supply, but they're also cheating. And US production is still high. The EIA data shows inventories building. So unless there's a real supply disruption, not just a headline, oil is going to struggle. The ten-year breakeven inflation moving up to two twenty-two suggests the bond market thinks inflation will stay elevated, but that's more about services and shelter than energy. Luna: So if I'm an investor, the takeaway might be: overweight companies that sell into the data center buildout, whether that's solar, natural gas, or utilities. Underweight pure-play oil producers that are vulnerable to a demand slowdown. Lucas: That's a reasonable positioning, but you have to be selective even within that. First Solar getting hit shows that not all clean energy names are safe. And Exxon's relative resilience shows that integrated oil companies have more levers to pull. The one thing I'd watch is the gasoline price. If it starts to fall meaningfully, that would be a signal that the demand weakness is spreading to consumers, which would be bad for everything. Luna: Right now it's still above three eighty, so consumers are still feeling it. That might be why the Fed is cautious. Lucas: Exactly. And that's the knot at the center of all this: energy prices are both a symptom of economic weakness and a cause of inflation. Until that knot loosens, we're going to keep seeing these strange divergences.