Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why the Oil-Gasoline Gap Finally Narrows
Transcript
- Lucas: So we've been tracking this weird pattern for a couple months now — oil drops, but gas stays high. Consumers feel it in their wallet, and it's been confusing because typically the two move together, just with a lag. Luna: Right, we did a few episodes on that. Episode 51 was 'How Gas Prices Stay High When Oil Drops 4 Dollars.' Then we flipped it and did 'Why Gasoline Is Falling Faster Than Oil This Time.' Lucas: Exactly. And the narrative shifted again. But over the past week, something changed. WTI crude settled at 76.54 yesterday — that's down over 5 percent in five trading days. Brent, the global benchmark, at 80.59, down about 3 percent. Meanwhile, the national average for regular gasoline fell to 4.05 dollars a gallon, down from 4.15 just a week earlier. Luna: So gas dropped 10 cents in a week. That's actually a pretty fast move, considering how sticky it's been. Lucas: Yeah, and the gap between crude and gasoline — what refiners call the crack spread — is narrowing. For months, refineries were running at reduced capacity, partly due to planned maintenance, partly because of export demand for diesel and jet fuel. That kept gasoline supplies tight even as crude prices fell. Luna: So the bottleneck was at the refinery level. But now something's unclogging? Lucas: Correct. There are a few forces at play. First, refinery utilization rates have been creeping up — we're past the spring turnaround season. Second, the Iran deal implementation — the one that started opening up the Strait of Hormuz — is actually adding to crude supply expectations. Tanker traffic in the Strait jumped this week, according to CNBC. That's extra barrels hitting the market. Luna: But we've been talking about that deal for weeks. Why would it affect gasoline now? Lucas: Because the lag time between crude supply news and actual gasoline at the pump is usually two to four weeks. The deal was finalized in late May, so we're now seeing the first wave of Iranian crude make its way to global refineries. That's putting downward pressure on crude, and with refineries running closer to normal, more of that crude is getting turned into gasoline. Luna: And that's why the crack spread is compressing. Refiners aren't able to command the same premium for turning crude into gas. Lucas: Right. Let me give you a specific number. The typical crack spread for gasoline — the difference between the price of gasoline and the price of crude – was hovering around 30 dollars a barrel in May. It's now down to about 22 dollars. That's a 27 percent drop. And that directly translates into lower prices at the pump, assuming retailers pass it through. Luna: Assuming. And we've seen some skepticism about that. Gas stations can be slow to lower prices when wholesale costs fall. Lucas: True, but the data this week suggests they are. The 10-cent drop in the national average is actually larger than what you'd expect from the crude move alone. Usually, a 5 percent drop in crude leads to maybe a 2 to 3 percent drop in gas. Here we saw gas drop about 2.5 percent in a week, which is on the high end of normal. Luna: So maybe this time the pass-through is faster because we're heading into summer driving season, and stations don't want to lose market share if competitors cut prices first. Lucas: That's part of it. Also, there's a shift in the broader energy market. Look at the XLE — the energy sector ETF — it's down 6.6 percent in five days. ExxonMobil dropped 6.3 percent, Chevron down 7.3 percent. Meanwhile, the iShares Global Clean Energy ETF, ICLN, is actually up 1.1 percent. That's a notable divergence. Luna: Investors are rotating out of oil stocks and into clean energy? That seems premature if oil is still above 75 dollars. Lucas: Well, maybe it's not about the level of oil, but the direction. Oil has been trending down since mid-April — WTI peaked around 88 dollars. Now it's at 76. If traders expect that trend to continue, they might move money into sectors that benefit from lower energy costs, like clean energy, which can be more competitive when fossil fuel prices fall. Luna: But clean energy stocks have been beaten up too. Enphase is down 4.2 percent this week, First Solar also down. ICLN is up, but it's still down year-to-date. Lucas: That's true. I'm not saying it's a clean energy rally — it's more of a relative performance story. The energy sector is getting hammered, and some money is rotating into other corners. But the bigger picture for listeners: the gasoline price relief they've been waiting for finally seems to be arriving. The question is how long it lasts. Luna: Because if crude keeps falling, gas could go even lower. But if the Iran deal falters or OPEC cuts production, the whole dynamic reverses. Lucas: Exactly. And that's the uncertainty. For now, the trend is your friend — lower crude, lower crack spreads, lower gas. We'll keep watching the data. If this trajectory holds, we could see the national average dip below 4 dollars by July 4th. Luna: That would be a nice Independence Day present for drivers. Let's hope the pass-through continues. Lucas: Absolutely. And speaking of things that are worth it — if this episode helped you understand why gas prices finally dropped, and you get value from the show, we do have a small way you can support what we do here. It's not a patreon or anything fancy. It's just a buy me a coffee page – buy me a coffee dot com slash fexingo. That's it. Luna: Yeah, we keep it ad-free, and listener support is what makes that possible. No pressure, but if today's breakdown was worth a coffee to you, that's the link. Lucas: And we appreciate every single one. Okay, back to the energy picture. Let's talk about natural gas real quick — Henry Hub is at 3.20, up 1.6 percent this week. That's interesting because it's been flat for months. Luna: What's driving that? Summer cooling demand? Lucas: Partly. But also, there's been a drop in production — some producers have been cutting back because prices were too low. That supply response is finally showing up. Plus, liquefied natural gas exports are picking up as we head into hurricane season, which can disrupt Gulf Coast facilities. Luna: So a small rally in nat gas while oil is falling. That's not something we see often. Lucas: It's a reminder that energy markets are not a monolith. Each commodity has its own supply and demand dynamics. For oil, it's about Iran and global demand concerns. For natural gas, it's about domestic production and weather. Investors need to treat them separately. Luna: And for consumers, the main takeaway is: keep an eye on the pump. If crude stays below 80, we might see gas below 4 dollars soon. Lucas: Exactly. We'll track it and report back. That's it for this episode of Energy Economics with Fexingo. Until next time.