Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Falling Despite the Iran Strike Escalation
Transcript
- Lucas: Oil markets are doing something very strange this week. The U.S. and Iran resumed military strikes early Wednesday morning, and you would expect crude to spike. Instead, both WTI and Brent are coming off a brutal five-day losing streak — down about eight and ten percent respectively. Luna: Right, I saw the numbers. Brent futures are now at $87 a barrel, WTI at $82. That's a far cry from the $98 we touched just a couple of weeks ago during the tanker strike panic. Lucas: Exactly. And the headlines are full of 'oil jumps' this morning, but those are likely intraday knee-jerk reactions. The weekly chart tells a different story — a sustained selloff that started before the latest strikes. So the question is: why is the market shrugging off the biggest geopolitical risk in the region? Luna: Is it because traders think the conflict won't actually hit oil flows? I mean, the Strait of Hormuz is still open, right? Lucas: That's part of it. The market has been through this cycle before. Back in April, when Iran first launched direct strikes on Israel, oil spiked briefly and then faded. Each escalation seems to produce a smaller and shorter price jump. The assumption now is that neither side wants a full-blown war that shuts down the strait — 20 percent of global oil passes through it. So the risk premium is shrinking. Luna: But there's also a demand story. The Asian tech selloff yesterday — South Korea's Kospi down eight percent — that's a signal that global growth fears are resurfacing. China's economy is still sputtering, and that matters more than a headline for oil prices. Lucas: Absolutely. And we have hard data to back that up. The latest U.S. CPI reading for June came in at 332.6, down from 333.98 in May. Core CPI was essentially flat. That tells you the economy is cooling. And the ten-year breakeven inflation rate — the bond market's view of future inflation — is at 2.20 percent, the lowest in months. Oil is a leading indicator of demand, and right now it's flashing caution. Luna: So lower oil prices actually feed into the inflation narrative. That's good for the Fed. But then why are stocks falling? It's like the market can't decide whether to celebrate cheaper energy or worry about recession. Lucas: Right, it's a messy signal. But for the purpose of this show, the key takeaway is that oil is defying the geopolitical gravity that usually sends it higher. And that has implications for energy producers, for gasoline prices, and for central bank policy. Luna: Speaking of gasoline, it's at $4.10 a gallon nationally, up from $4.00 a week ago. So that's still ticking up, but not as much as you'd expect given the oil moves. The crack spread — the refining margin — has compressed. Lucas: That's a good point. Refiners are running at high utilization, and demand might be weaker than seasonal norms. So the pass-through from crude to the pump is slower. But if oil stays in the low eighties, we could see gas prices start to ease by late August. Luna: You know, I think this episode is a good reminder that sometimes the most interesting story in energy isn't the spike — it's the non-reaction. The market is telling us something about excess supply, spare capacity, and maybe even a structural shift in how the world prices geopolitical risk. Lucas: Yeah, it really is. And that's the kind of analysis that we dig into here every day. It's also a good place to mention — a lot of you listening already know this, but for anyone new — the show is completely ad-free and independent. That's because a small group of listeners chips in monthly over at Buy Me a Coffee dot com slash fexingo. It's not a big ask. It's just what keeps us going without any corporate sponsors steering the conversation. Luna: And we genuinely appreciate it. It means we can spend time on the angles that matter, not just the ones that generate clicks. So, if walking through the economy with us has made something click for you, that's the place. Lucas: Absolutely. Back to oil. So, Luna, one factor we haven't mentioned is OPEC+. The group has been hinting at possible production increases later this year, and that's been hanging over the market. If they add barrels while demand is softening, you get a perfect recipe for a price decline. Luna: Right, especially since the Saudis have spare capacity of around two million barrels a day. The market knows that if the Strait of Hormuz were threatened, Saudi could ramp up quickly from other fields. That's a real backstop. Lucas: Exactly. And the U.S. is producing at record levels — over 13 million barrels a day. So there's a lot of supply flexibility outside the conflict zone. The days when a single geopolitical shock could send oil to $150 might be behind us, at least for now. Luna: Unless the conflict widens to include Iraq or Kuwait, or if Iran successfully mines the strait. Those are tail risks, but the market seems to be assigning them very low probability. Lucas: And that low probability is reflected in the options market. Volatility premiums are actually lower than they were in June. Traders are selling insurance rather than buying it. That's a powerful contrarian indicator, but it could also be the smart money saying 'this time is different'. Luna: So what would break this calm? If we see a confirmed hit on a tanker, or if the U.S. strikes Iranian oil infrastructure. Lucas: That's the watch point. So far, the strikes have been on military targets. But if one side crosses that line, all bets are off. For now, the market is priced for a contained conflict. But we'll be watching that premium closely. Luna: And on the inflation side, if oil stays down, it gives the Fed room to pause on rate hikes — maybe even start talking about cuts later this year. The ten-year breakeven at 2.20 is well anchored. Lucas: Right. So ironically, the same forces that are pushing oil down — demand fears, ample supply, contained geopolitics — are actually helping the broader economy. It's a silver lining in a pretty complicated picture. Luna: We'll see if it holds. Thanks, Lucas. Lucas: Thanks, Luna. That's our take on this Tuesday morning. We'll be back tomorrow with another angle.