Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why the Oil-Renewables Divergence Matters for Investors
Transcript
- Lucas: WTI crude is sitting near seventy-five dollars a barrel this morning, Brent just under seventy-nine. Meanwhile the Invesco Solar ETF, TAN, is down about four and a half percent on the week. The iShares Global Clean Energy ETF, ICLN, off a similar amount. That gap between oil and renewables has been a persistent theme through July, and I think it's worth unpacking what's actually driving it, because it's not as simple as 'oil up, everything else down.' Luna: Right — it's been going on for weeks now. We've talked about the Middle East headlines, the IEA revising its demand forecast. But I want to get at the mechanics. What's the actual transmission belt from airstrikes in the Gulf to a solar stock falling in New York? Lucas: That's exactly the right question. And before we dive in, I want to mention something about how we do these episodes. We deliberately keep them ad-free. No sponsors, no mid-roll interruptions. It's a choice we made because we think the conversation flows better without a commercial break. If that's something you value and you want to support that choice, there's a link: buy me a coffee dot com slash fexingo. One-time, no subscription, no perks. Just helps keep the lights on. Luna: Yeah, and it's a small thing that makes a big difference for us. Appreciate anyone who does. Lucas: Alright, so back to the divergence. Let me start with a number that I think frames the whole thing: the ten-year breakeven inflation rate. That's the market's expectation for average inflation over the next decade. As of Friday, it was at two point two four percent. That's up from two point two three the week before — tiny move, but the direction matters. When breakevens creep higher, it usually means investors expect more inflation, not less. And that has a very different impact on oil producers versus clean energy developers. Luna: Because oil companies can pass through higher costs more easily? Or is it about the discount rate on future cash flows? Lucas: Both, honestly. Oil producers — the big integrated names like ExxonMobil and Chevron — they have relatively short-cycle cash flows. They drill a well, produce oil, sell it at today's price. Their revenues adjust almost in real time with inflation. A renewable project, on the other hand, involves huge upfront capital expenditure and then a twenty- or thirty-year stream of fixed or slowly escalating power purchase agreements. When breakevens rise, the discount rate applied to those future cash flows goes up, and the net present value of the project falls. So higher inflation expectations mechanically hurt clean energy valuations more than they hurt oil company valuations. Luna: That's a structural argument. But what about the near-term catalyst? The Middle East headlines this week — the US and Iran exchanging airstrikes again, South Korea's Kospi down seven percent. How much of the oil rally is genuinely about supply risk? Lucas: A decent chunk, but I'd argue less than the headline would suggest. WTI has been in the low-to-mid seventies for most of June and July. The spike we're seeing this week is maybe two to three dollars of genuine geopolitical risk premium. But the bigger story is on the demand side. The IEA's latest monthly report, which came out last week, revised its 2026 demand growth forecast upward by about two hundred thousand barrels per day. That's not huge, but it's a reversal from the previous three months where they kept cutting estimates. Luna: And that demand revision came alongside a pretty stark warning about supply constraints, right? US production growth is slowing. Lucas: Exactly. US crude output has essentially flatlined around thirteen point three million barrels per day since March. The Permian Basin is still growing, but the pace has slowed because the best drilling locations are getting tapped out. The EIA's latest drilling productivity report showed new-well oil output per rig in the Permian falling for the third straight month. So you have a situation where demand expectations are ticking up, supply growth is decelerating, and opec plus is still holding about five million barrels per day of spare capacity off the market. That's a recipe for sustained higher prices. Luna: Which is great for the energy sector — the XLE is up almost four percent on the week. But the clean energy names are getting hammered. ICLN and TAN both down more than four percent. And it's not just an ETF thing — First Solar is off two percent, Enphase is basically flat, which for them is actually a good week. Lucas: Enphase had been down seven percent in some of our prior episodes. So flat is a relative win. But the broader point is that clean energy stocks are being repriced for a higher for longer interest rate environment. And it's not just about breakevens — the actual ten-year Treasury yield, which is the risk-free rate that anchors discount rates, has been grinding higher. It was around four point three percent in early June. It's now closer to four point four five percent. For a company like Enphase, whose valuation depends on future earnings growth from residential solar installations that are financed with debt, a fifteen basis point move in the ten-year is material. Luna: And there's a policy dimension too. The Inflation Reduction Act tax credits are still in place, but there's growing uncertainty about whether a future Congress might modify or sunset them early. That kind of regulatory risk tends to get priced into renewable stocks more aggressively when rates are rising. Lucas: Right. Because the IRA credits are the backbone of the project economics for a lot of utility-scale solar and wind. If there's even a ten percent chance they get scaled back in 2027 or 2028, that uncertainty gets magnified by the discount rate. So you end up with a double whammy: higher rates lowering present values, and policy uncertainty adding a risk premium on top. Luna: So what does this mean for an investor who's looking at the energy space right now? Is the right move to just follow the momentum into oil and gas? Lucas: I think that depends on your time horizon. If you're trading the next three to six months, the macro tailwind for oil is pretty clear: geopolitical risk, supply constraints, and a Fed that's probably done hiking but isn't cutting yet. The energy sector earnings season starts this week — JPMorgan reports tomorrow, but for oil, we'll get Schlumberger and Halliburton later in July. Those numbers are likely to be strong. So near-term momentum favors the energy sector. Luna: But if you're looking out two or three years, the case for clean energy is still intact structurally. The global buildout of renewables is not slowing — it's accelerating. It's just that the stock market is a discounting mechanism, and right now it's discounting near-term headwinds. Lucas: Exactly. And there's one more data point I want to bring in. The IEA's demand revision I mentioned — it's largely driven by emerging markets, especially India and Southeast Asia, where oil demand for transportation and industrial use is still growing strongly. But the same report also noted that global renewable capacity additions are on track to grow by another thirty percent this year, led by solar in China and the US. So the long-run trend hasn't changed. It's just that the financial conditions for capital-intensive industries have tightened temporarily. Luna: So the divergence is partly a rates story, partly a geopolitics story, and partly a market structure story. But it's not a signal that the energy transition is stalling. Lucas: I would say no. The transition is still happening. What we're seeing is a cyclical repricing within a secular trend. And episodes like this — where oil and renewables move in opposite directions — they create opportunities. If you believe the long-term thesis, the sell-off in clean energy names might eventually look like a buying opportunity. But you have to be patient. Luna: And maybe a little selective. Not all clean energy companies are equally exposed to rising rates. NextEra Energy, for example, is only up half a percent this week. It's been relatively resilient because it has a regulated utility business that provides stable cash flows. Lucas: Good point. NextEra's utility segment is rate-regulated, so its earnings are less sensitive to interest rate moves. And its renewable development arm, while exposed, is diversified across wind, solar, and storage. So the company has a buffer. Compare that to a pure-play residential solar company like Sunrun, which is more leveraged to consumer financing costs. Those stocks have been hit much harder. So the divergence isn't just between oil and renewables — it's within renewables themselves. Luna: Which brings us back to the core theme of this show: energy economics is never one-dimensional. The same rising rate environment that boosts oil stocks by signaling inflation can crush high-growth renewable stocks by raising their cost of capital. Lucas: Exactly. And that tension — between near-term price action and long-term structural change — is what makes this space so interesting to follow. We'll be watching the earnings calls over the next two weeks to see how management teams are talking about the rate environment and their project pipelines. That will tell us a lot about whether this divergence has more room to run. Luna: And we'll be right here tracking it. Thanks for listening.