Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Stocks Are Falling Faster Than Crude in 2026
Transcript
- Lucas: So Brent crude dropped seven point four percent in the last five trading days. WTI is off four point six. That's a meaningful move, especially after a fairly quiet stretch in April. Luna: And yet energy stocks got hammered even harder. ExxonMobil down seven point eight percent, Chevron down six point four, the XLE energy ETF off five point six. That's a bigger decline than the crude itself. Lucas: Right. And that's the puzzle I want to unpack today. Usually when oil drops, energy stocks follow roughly in line, maybe with a lag. But this week the stocks are falling faster. It suggests something more than just a crude price move is going on. Luna: So what's driving the extra pain? Is it a sector rotation, or are there company-specific issues? Lucas: I think it's a combination. First, look at the composition of the XLE. It's heavy on integrated majors like Exxon and Chevron, which have big refining and chemicals businesses. Refining margins have been compressing since the start of the year. The crack spread—the difference between crude and gasoline—narrowed from about thirty dollars a barrel in January to around twenty now. Luna: So even if crude stabilizes, the downstream piece is under pressure. That hits earnings power. Lucas: Exactly. And the market is forward-looking. If investors expect refining margins to stay compressed through the summer driving season, then Exxon's earnings per share for the next few quarters might disappoint. The stock price adjusts before the actual earnings report. Luna: But crude itself is still above ninety dollars a barrel. That's not exactly cheap. Why aren't the upstream-only stocks, like ConocoPhillips or the pure-play E&P companies, a bit more resilient? Lucas: Well, ConocoPhillips is down six point eight percent over the same period. So even the upstream names are getting hit. One reason is that the market is pricing in lower future crude prices. The futures curve is in contango now—further-out contracts are cheaper than spot. That's a signal that traders think the current price won't last. Luna: And when the curve is in contango, it hurts the economics of hedging. Producers lock in lower prices for future production. That feeds into lower expected cash flows. Lucas: Right. Also, there's a hedge fund dynamic. Energy stocks had a massive run from late 2024 through early 2026. The sector was one of the best performers. A lot of momentum money piled in. Now that crude is rolling over, those positions are being unwound quickly. It's a crowded trade exiting at the same time. Luna: And the exit door got narrower when the S&P 500 hit another record this week. Money rotates from energy into tech. SK Hynix—a Korean chipmaker—hits a one trillion dollar valuation. That's where the growth narrative is. Lucas: And clean energy stocks are also surging. The TAN solar ETF is up thirteen percent in five days. Enphase Energy is up forty-three percent. That's a stark contrast to the oil patch. The market is betting on a long-term shift, not just a short-term oil dip. Luna: That said, I think there's a risk that the sell-off in energy stocks is overdone. The global economy still runs on oil. Demand is not collapsing. The IEA still forecasts record demand in 2026. So maybe this is a buying opportunity for contrarians. Lucas: Maybe. But let's look at the data a bit more. The CPI came in at three hundred thirty-two point four in April, up from three hundred thirty point three in March. Inflation is still sticky. The Fed is not cutting rates soon. That creates a higher discount rate for future cash flows, which hits valuation multiples across the board, but especially for stocks with elevated cyclical risk like energy. Luna: And the 10-year breakeven inflation rate is at two point four percent, which is actually down from earlier this year. So the market is pricing in lower long-run inflation. That could be good for growth stocks but bad for commodities. Lucas: Good point. Lower inflation expectations mean lower demand for inflation hedges like oil and gold. Energy stocks lost that tailwind. But let's bring it back to the stock-specific level. Exxon's first-quarter earnings in early May actually beat estimates, but the stock dropped on the day. Why? Because management said they would slow down buybacks and prioritize debt reduction. Investors punished that. Luna: Yeah, buybacks were a big part of the total return story in energy. If the companies themselves signal that cash returns are going to be lower, then the stocks lose their main attraction. Lucas: And it's not just Exxon. Chevron's CFO mentioned on the last earnings call that they might not increase the buyback this year. So the narrative shift is real. The market is repricing the sector based on lower expected shareholder returns. This is part of the conversation that sometimes gets lost—and it's also why we can keep doing what we do. Luna: How do you mean? Lucas: Well, this show doesn't have ads. It's funded directly by listeners who find value in the analysis. A small group of subscribers chips in monthly at buy me a coffee dot com slash fexingo. And that's what makes it possible to produce this many episodes without having to pander to sponsors or chase clicks. It's a model that keeps the focus on the data and the reasoning. Luna: And we're grateful for every bit of support. It lets us stay independent and dig into topics like what's really moving energy stocks versus crude, without worrying about ad read requirements. Lucas: Exactly. So back to the market. If you're looking at this sell-off, the key question is whether the divergence between oil and energy stocks is a leading indicator or just noise. Historically, when stocks fall faster than crude, it often foreshadows further weakness in oil. The equity market is more forward-looking and tends to price in downturns earlier. Luna: But there have been counterexamples. In 2020, energy stocks bottomed before crude did. So early 2020, stocks started recovering in April while oil didn't bottom until negative prices in late April. That was an extreme case, but it shows equities can be a leading indicator of a recovery too. Lucas: Right. So which is it now? I'd argue this looks more like a top than a bottom. The macro environment—sticky inflation, high rates, a strong dollar—is headwind for commodities. And the sentiment shift from buyback euphoria to caution is tangible. Unless we get a supply shock, it's hard to see crude rallying back above one ten in the near term. Luna: And supply is actually growing. U.S. production is above thirteen million barrels a day, and OPEC+ is gradually unwinding cuts. So the supply side is not tightening. That argues against a sharp reversal. Lucas: So for investors holding energy stocks, the question becomes: do you trust the valuation? The XLE is trading at about ten times forward earnings, which is cheap historically. But cheap can get cheaper if earnings estimates get cut. And we're already seeing downward revisions this quarter. Luna: If earnings come down, the P/E ratio might not be as attractive as it looks. Forward P/E is based on optimistic estimates. Once analysts revise down, the multiple can stay flat or even shrink. Lucas: Exactly. I've been looking at the earnings revision ratio for energy in the S&P 500. It turned negative in April and has stayed there. More analysts are cutting estimates than raising them. That's a red flag. Luna: But there's a contrarian case: if the sell-off is purely technical—hedge fund liquidation, tax-loss selling, momentum unwind—then fundamentals might reassert themselves later this year. But it's hard to call the bottom. Lucas: Right. And timing is everything. The one thing I'd watch is the gasoline market. We're entering summer driving season. Gasoline inventories are below the five-year average. If demand picks up and refining margins widen, that could stabilize the integrated stocks. But that's a near-term catalyst, not a structural change. Luna: So where does that leave the average listener who might own energy in a 401k or have a position in an ETF? Do they sell into weakness, hold, or buy more? Lucas: That's a personal decision based on risk tolerance and time horizon. But I'd say: if you're a long-term investor, energy isn't dead. The world needs oil for decades. But if you're looking for the next twelve months, the momentum is clearly against the sector. The money is flowing to AI, clean energy, and growth stocks. That's where the market is voting with its dollars. Luna: And the clean energy rally is remarkable. Enphase up forty-three percent in a week, First Solar up twenty-two percent. That's a huge rotation out of fossil fuels and into renewables. It's not just a one-week blip. Lucas: No, it's part of a longer trend that's been building since the Inflation Reduction Act and the push for energy independence. The market is betting that the future is solar and storage, not new oil fields. Luna: So the energy stock sell-off is a signal about the future of energy, not just a reaction to crude prices today. Lucas: Exactly. And that's the key takeaway. The stocks are telling us something about the direction of the economy and policy. Pay attention.