Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Plunges as the Strait of Hormuz Closes Again
Transcript
- Lucas: WTI crude at seventy-six fifty-four, down over five percent in five days. Brent at eighty fifty-nine, down three percent. And this is happening while Iran reportedly closes the Strait of Hormuz again. That's the same chokepoint that spiked oil above ninety-five back in episode forty-four. Luna: So the market is basically shrugging off what used to be a guaranteed price spike. What changed? Lucas: Well, start with the timing. The headline dropped Saturday, June twentieth, and we're seeing this on the futures open. But the nuclear talks—remember, those had been building toward a deal that would have added Iranian barrels back to the market. The closure might actually be a negotiating tactic, not a full blockade. The market seems to think it's temporary. Luna: Right, because the last time they closed it, prices shot up fast, but then came back down when it reopened. Traders have that pattern fresh in their minds. Lucas: Exactly. And look at the broader numbers. The WTI price before this headline was already sliding from around eighty-five. The EIA data showed U.S. crude inventories building, Chinese demand softening—you add a potential Iran deal that could flood the market, and the geopolitical premium just isn't sticking the way it used to. Luna: But the Strait carries about twenty percent of global oil transit. If it stays closed even a week, you'd think physical supply concerns would kick in. Lucas: You'd think. But the market is also watching the demand side. The latest CPI reading for May came in at three hundred thirty-four, up from three hundred thirty-two-point-four-one in April. Core CPI at three hundred thirty-six-point-one. Inflation is still sticky, which means the Fed is likely to keep rates higher for longer. That weighs on economic growth and oil demand forecasts. Luna: So you've got a geopolitical supply risk on one hand, and a macro demand headwind on the other. And the demand headwind is winning. Lucas: It's winning emphatically. The energy sector ETF, XLE, is down six-point-six percent in five days. Exxon dropped six-point-three percent, Chevron down seven-point-three. That's a massive sell-off for companies that should benefit from higher oil prices if the Strait closure were taken seriously. Luna: It's almost like traders are saying 'we've seen this movie before.' The Strait closure in April lasted like two days, and prices retraced all the gains within a week. Lucas: Right. There's also the clean energy angle. The global clean energy ETF, ICLN, is up one-point-one percent over the same period. So money is rotating out of oil and into renewables, perhaps betting that the volatility in fossil fuels—especially with geopolitical wildcards—makes the energy transition more attractive. Luna: That's a longer-term thesis, but it's showing up in the price action right now. Even Enphase, which has been getting crushed lately—down four percent in the week—is still only down modestly compared to Exxon. Lucas: Now, let's talk about what this means for gas prices at the pump. Regular gasoline averaged four-oh-five a gallon on June fifteenth, down from four-fifteen a month earlier. The decline is happening, but it's slow. Part of that is the refining margin—crack spreads are still elevated because refining capacity is tight. Luna: So even if crude drops another five bucks, we might not see a big drop at the pump until late July or August, assuming the Strait doesn't actually cause a supply crunch. Lucas: Exactly. And that's the tricky part for consumers. They see oil at seventy-six and wonder why gas isn't below three-fifty. But the link is lagged and filtered through refinery operations, seasonal blends, and local taxes. Luna: One thing I'm watching is the forward curve. Is the contango or backwardation telling us anything about where traders think supply is headed? Lucas: Good question. The futures curve for WTI is in a mild contango—meaning later-dated contracts are slightly higher than spot. That suggests the market doesn't expect an immediate supply squeeze. If the Strait were seen as a real, lasting disruption, you'd see backwardation— spot higher than futures. We're not seeing that. Luna: So the market is effectively pricing in a quick resolution. Maybe a diplomatic off-ramp that reopens the Strait within days. Lucas: That's the base case. But there's a tail risk. If the closure drags on and the U.S. or its allies respond militarily, all bets are off. Oil could spike twenty percent overnight. But that's not what the options market is pricing—the implied volatility in crude options is actually lower than it was during the April closure. Luna: Interesting. So traders are less scared this time, even though the headline sounds more dramatic. Lucas: Exactly. And that's the kind of insight that makes following this show worthwhile—understanding the mechanics behind the headlines. Luna: Yeah, I often hear from listeners who say that connecting these dots has changed how they think about energy and the economy. And we're able to do this ad-free, which makes it even better. Lucas: If you've found value in walking through the energy economy with us, we do have a small way you can support the show. It's buy me a coffee dot com slash fexingo. No pressure, but anything helps keep us independent and free for everyone. Luna: Absolutely. And we appreciate every single listener, whether you chip in or just keep tuning in. Now, back to the Strait—Lucas, you mentioned the options market. Give us a little more detail on what the vol surface is saying. Lucas: Sure. The at the money implied volatility for WTI options expiring in thirty days is around thirty-two percent, down from forty percent during the April closure. That tells you traders are expecting less price swing over the next month. They're not hedging aggressively against a big upward move. Luna: So if you were a hedge fund looking to make a contrarian bet, you might buy cheap out-of-the-money call options betting on a spike, just in case the market is too complacent. Lucas: Exactly. And some Tail funds might be doing exactly that. But the dominant view is that the Strait will reopen, nuclear talks might still limp forward, and oil will settle back into the mid-seventies range. Luna: What about natural gas? Henry Hub is at three twenty, up slightly in the week. Any spillover from the oil volatility? Lucas: Not much. Nat gas is mostly a domestic market now, driven by weather and storage levels. The oil story doesn't directly affect it unless the Strait closure somehow impacts LNG tankers from Qatar—but that's a stretch. The market is focused on summer cooling demand and injection rates. Luna: So for oil, the big question over the next few days is whether the Strait closure becomes a real supply event or just another negotiating bluff. Lucas: That's it. And given the market's current pricing, the bar for a real disruption is high. If we see Iran allow tanker traffic by Tuesday, oil could gap down another three to five percent. If they hold firm, we might test eighty again. Luna: Either way, it's a fascinating moment for energy economics. Thanks for breaking it down, Lucas. Lucas: Thanks, Luna. And thanks to our listeners. We'll keep tracking this story through the week.