Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why the Iran Deal Could Crush Oil Prices Below 80
Transcript
- Lucas: Oil is having its worst week in months, and the reason is sitting in a negotiating room in Vienna. WTI crude dropped 7 percent over the last five sessions — we're looking at 84.88 a barrel as of this morning. Brent similar story, down 7.3 percent to 87.33. Luna: And this is all about the Iran nuclear deal, right? Markets are pricing in a signing that feels imminent. Lucas: Exactly. The headline on Friday from the Trump administration: quote, 'deal signing likely in coming days, but not 100 percent certain.' That 'not 100 percent' is doing a lot of work. But the market is treating it as essentially done. Luna: So what does Iran actually bring to the table here? In terms of barrels. Lucas: Roughly one point five million barrels a day of potential additional supply. That's what Iran could export within six to twelve months if sanctions are lifted. To put that in context, OPEC's total spare capacity is maybe three to four million barrels. So this is a big chunk. Luna: Right, and the market is front-running that. We saw the selloff accelerate after the Thursday headlines. Prices are already below where they were before the Kuwait airspace closure spike a few weeks ago. Lucas: Yes. Remember Episode 44? That Kuwait scare pushed WTI above 95. Now we're at 84.88. That's a ten-dollar swing in about a month. The Iran premium that had been baked in since early spring is unwinding fast. Luna: But the actual deal hasn't been signed. So if it falls through — what then? Prices spike back up? Lucas: Almost certainly. You could see a five to eight dollar jump in a day. The market is positioned for a deal. If it doesn't happen, those positions reverse violently. That's why you're seeing energy stocks down too — Exxon down 3.1 percent on the week, Chevron down 1.1 percent. XLE, the energy sector ETF, off 1.3 percent. Luna: And interestingly, clean energy stocks are also sliding. Enphase down 4 percent this week, First Solar down 2.9 percent. That seems counterintuitive if oil is falling. Lucas: It does, but I think there's a separate driver there. The clean energy selloff has been going on for months — we covered that in episodes 33 through 38. But this week, the macro headwind is higher interest rates. The 10-year breakeven inflation rate ticked up to 2.31 percent on Friday. That's a signal that inflation expectations are sticky. Luna: And the CPI data from May — released a couple weeks ago — showed core CPI at 336.1, up from 335.42. That's a 2.3 percent annualized increase month over month. Not exactly cooling. Lucas: Right. So you've got a double whammy for clean energy: higher rates make their future cash flows less valuable, and falling oil makes the substitution narrative less urgent. Even though, logically, the Iran deal doesn't directly affect solar panel demand. Luna: Let's talk about gasoline. Because the data we have shows regular gas at $4.15 a gallon as of June 8, down from $4.30. But crude is down way more percentage-wise. Why the lag? Lucas: Two reasons. First, gasoline prices are sticky on the way down — refiners don't pass through every penny of crude decline immediately, especially during summer driving season when demand is high. Second, the actual crude that goes into gasoline was bought weeks ago at higher prices. So the retail price lags the spot price by a few weeks. Luna: So if crude stays at 85 or lower, we should see gas below $4 by July. Lucas: That's the expectation. But it depends on the deal actually getting signed. And even then, there's a nuance: Iran's oil is mostly heavy sour crude, not the light sweet that makes gasoline. So the impact on gas prices isn't one-to-one. Luna: Good point. So the kind of oil matters. Let's talk about what happens if the deal goes through — not just day one, but six months out. Lucas: If the deal is signed and sanctions are lifted, Iran can ramp up exports relatively quickly. They've been storing oil on tankers, so there's a floating inventory of maybe 50 to 60 million barrels that can hit the market immediately. That alone could push WTI into the high 70s. Luna: And OPEC? How do they react? I mean, they've been trying to prop up prices with production cuts. Lucas: OPEC+ has a meeting scheduled in early July. If Iranian oil comes back, they'll face pressure to cut further to absorb that supply. But it's complicated — Russia wants higher prices, Saudi Arabia wants market share. And Iran isn't part of the OPEC+ quota system under sanctions. So once they're back, they'll produce whatever they can. Luna: So the range we're looking at for the rest of 2026: if deal, maybe 75 to 85. If no deal, back to 90 to 100. Lucas: That's roughly right. And the market is currently pricing in the deal scenario. The speed of the move this week tells you how much conviction there is. But remember, 'not 100 percent certain' is the official line. Luna: Speaking of conviction — and I know this is a bit of a pivot — but I think a lot of our listeners appreciate that we can dive into this kind of detail because the show stays ad-free and independent. If you're one of those listeners, and you've gotten something out of walking through the economy with us, buying us a coffee is a small way to keep that going. Lucas: Yeah, totally. It genuinely makes a difference. A couple of dollars a month helps cover hosting and research costs. That's buymeacoffee dot com slash fexingo. All lowercase. Luna: And we really appreciate it. Alright, back to oil. Lucas, you were saying the market is pricing in the deal — but there's also a separate factor: the SpaceX IPO. Lucas: Right. That's a huge story — SpaceX closed at $161, up 19 percent on its debut. It's the biggest IPO of the decade so far. But I think the spillover to energy markets is indirect. It's a risk-on signal. When a high-profile stock pops that much, it boosts overall market sentiment, which can support commodities. But in this case, the Iran effect is overwhelming that. Luna: So the next few days are critical. We've got the potential deal signing, the OPEC+ meeting looming, and summer driving season in full swing. What are you watching most closely? Lucas: The dollar, actually. If the deal goes through, oil prices fall, which is deflationary. That could push the Fed to ease off rate hikes. A weaker dollar would then support oil prices again. So it's circular. But the immediate catalyst is the pen in Vienna. Luna: Alright, we'll be tracking it. Thanks Lucas. Lucas: Thanks Luna. We'll be back tomorrow.