Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / What the Oil-Renewables Split Means for Your Portfolio
Transcript
- Lucas: Crude oil is up more than six and a half percent over the past five trading days. WTI settled at seventy-three ten this morning. Brent pushed above seventy-seven and a half. Meanwhile, the clean energy ETF ICLN dropped five and a half percent over the same stretch. Solar-focused TAN fell more than six. Enphase lost eight percent. First Solar, three and a half. Luna: Same macro, two completely different worlds. What's driving the wedge this time? Lucas: The immediate catalyst is geopolitical. Headlines out of the Middle East — Iran-U.S. tensions are escalating again, and the market is pricing in a real risk of supply disruption. Brent futures are in backwardation, meaning near-term contracts are more expensive than later ones. That's the classic signal of a tight physical market. Luna: And yet the economic data doesn't scream demand surge. The latest CPI print was three hundred thirty-four, core CPI three thirty-six point one — both creeping higher. The ten-year breakeven inflation rate is stuck at two point two five percent. Lucas: Right. This isn't a demand-led rally. It's a supply scare layered on top of a market that was already reasonably balanced. WTI had been hovering around sixty-nine seventy just a week ago. Now we're at seventy-three ten. That's a meaningful jump for a commodity that usually moves in increments of a few cents. Luna: So why are renewables getting hammered? If oil is spiking on geopolitical risk, you'd think clean energy would benefit from the 'substitution narrative' — higher fossil fuel prices make solar and wind more competitive. Lucas: You would think. But the market isn't buying that story right now. Instead, the selloff in solar names looks tied to two factors. First, interest rate expectations. With core CPI still sticky, the market is pricing in a higher for longer fed funds rate. Clean energy companies carry heavy debt loads for project financing. Higher rates compress their returns. Luna: Second factor? Lucas: Trade policy. The Biden administration recently announced exemptions on certain solar tariffs, but the industry response has been muted. The reality is that solar module prices are already under pressure from overcapacity in China. Tariff relief helps, but it doesn't solve the glut. First Solar, which is a us based manufacturer, has been a relative outperformer, but even it dropped three and a half percent this week. Luna: So the clean energy selloff is less about oil and more about rates and oversupply. But the timing — coinciding with an oil spike — creates this striking visual divergence on the screen. Lucas: Exactly. And that visual can tempt investors into a false narrative: that oil and renewables are in a zero-sum game. In reality, they respond to different drivers. Oil is reacting to a geopolitical supply shock. Renewables are reacting to the interest rate and policy environment. They can diverge without contradicting each other. Luna: Let's talk about the oil side a bit more. Brent at seventy-seven sixty-six — that's up nearly eight percent in five days. How much of that is speculation versus actual supply risk? Lucas: Some of it is positioning — hedge funds were underweight oil coming into July, and the breakout above seventy triggered short covering. But the backwardation in Brent is real. When the front-month contract is at seventy-seven sixty-six and the six-month forward is at seventy-two, that's a five-dollar premium. Physical traders are paying up for prompt barrels. That suggests genuine concern about availability. Luna: The XLE energy ETF is up five point three percent this week. Exxon is up three point six, Chevron six point two. But the biggest gainer among the majors is ConocoPhillips, up seven point three percent. Why Conoco? Lucas: Conoco has the most leverage to oil price moves in its portfolio — higher percentage of production is unhedged and tied to Brent. When oil jumps, Conoco's earnings sensitivity is higher than Exxon's, which has a larger downstream and chemical business. So the market rewards it disproportionately. Luna: Makes sense. Now, the clean energy side: Enphase down eight percent in a week. That's brutal. The stock was already down more than fifty percent from its 2022 highs. Is there any fundamental news driving this, or is it just sector rotation? Lucas: A bit of both. Enphase reported quarterly results a few weeks ago that were in line, but guidance was soft. European demand is sluggish, and US residential solar installations are flat. The market is also worried about inventory buildup at distributors. So the selloff has fundamentals behind it. The macro environment just adds pressure. Luna: And for First Solar, down three point four percent — that's less severe. Their thin-film technology and US manufacturing base give them a moat. But even they can't escape the broader sector gravity. Lucas: First Solar actually has a pretty strong backlog and is benefiting from the Inflation Reduction Act's domestic content bonuses. So the selloff feels more like sympathy weakness than a company-specific problem. If rates stabilize, First Solar could bounce faster than Enphase. Luna: Alright, so for an investor looking at this divergence, what's the takeaway? Do you chase the oil rally or buy the renewable dip? Lucas: Short term, oil has momentum. The geopolitical risk premium could persist for weeks. But chasing a seven percent weekly move in a commodity that's already pricing in a supply disruption is risky. If tensions de-escalate, oil could give back those gains just as fast. On the renewable side, the selloff might be a buying opportunity for patient capital, but the catalyst to reverse the trend is unclear. You need either a decisive drop in interest rates or a policy shift that genuinely boosts demand. Luna: And that's where the breakeven inflation rate matters. At two point two five percent, the market is not expecting a rapid disinflation. So the Fed stays on hold. That's headwind for clean energy financing. Lucas: Exactly. The one wildcard is the upcoming election. If the policy outlook changes significantly — more subsidies or, conversely, rollbacks — that could realign the sector overnight. But for now, the divergence is driven by rates and geopolitics, not by a fundamental shift in energy transition momentum. Luna: Speaking of momentum, I want to touch on something we don't talk about enough: how the show itself keeps going. Lucas, we produce over three hundred episodes a year across this network, and we don't run ads. That's a deliberate choice. Lucas: It is. And it's only possible because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. That's literally what keeps the lights on — no ad revenue, no corporate sponsorship, just direct listener support. Luna: If you've been following these energy market breakdowns and finding them useful, that's the way to keep us independent. No pressure, but it does make a real difference. Lucas: Right. So back to the energy picture: let's zoom out a bit. The ICLN clean energy ETF is now at nineteen oh five. That's near its lows for the year. The TAN solar ETF is at fifty-four fourteen. Both are down roughly thirty percent from their 2025 peaks. Meanwhile, the S&P 500 is near all-time highs. The divergence isn't just between oil and renewables — it's between renewables and the broader market. Luna: That's the part that worries me. When an entire sector gets abandoned while the rest of the market rallies, it often signals structural headwinds, not just a temporary rotation. Lucas: Agreed. But remember, clean energy had a massive run in 2020 and 2021. ICLN tripled from its pandemic lows. Some of this selloff is mean reversion. The question is whether the sector is now oversold. On a price to earnings basis, Enphase trades at about fifteen times forward earnings — that's cheap for a company that's still growing, albeit slowly. First Solar trades at twelve times. Those multiples are more typical of mature industrial companies, not growth stocks. Luna: So value investors might be sniffing around. But growth investors are staying away until they see a catalyst. Lucas: Exactly. And the catalyst likely comes from outside the sector — lower rates, a geopolitical de-escalation that lowers the risk premium on everything, or a policy surprise. Until then, the divergence persists. Luna: One last data point: natural gas is down slightly this week, at three twenty-two. That's interesting because gas is often a bridge fuel between oil and renewables. If gas is flat, it suggests the oil rally is purely about crude-specific supply, not a broader energy inflation. Lucas: Good catch. Henry Hub at three twenty-two is actually down about a percent over the past week. That reinforces the idea that this is an oil story, not an everything-rally. Gas has its own dynamics — ample storage, mild summer demand so far. The divergence between oil and gas is another layer worth watching. Luna: So to sum up: oil up on Iran fears, renewables down on rates and oversupply, gas flat. Three distinct narratives under one energy umbrella. Lucas: And the smart move for listeners is to not conflate them. If you're investing in energy, you need to know which driver matters for each sub-sector. The days of a single 'energy trade' are long gone. Luna: Alright, Lucas. Good breakdown. I think our listeners have a much clearer picture now. Lucas: Glad to help. We'll keep tracking these moves and bring you the context as it develops.