Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Natural Gas and Oil Are Diverging
Transcript
- Lucas: So WTI crude has dropped more than ten percent in the last five trading days. That's a serious move. But natural gas? Up about three percent over the same stretch. Luna: That feels counterintuitive. Usually, when oil sells off, energy commodities broadly follow. What's driving the divergence? Lucas: Let's start with the oil side. The biggest headline over the weekend was Trump saying the Iran deal to reopen the Strait of Hormuz is quote 'largely negotiated' and will be announced soon. Markets are pricing in the possibility of more supply hitting the market. Luna: Right — if Iranian barrels come back, that changes the supply-demand balance pretty significantly. Lucas: Exactly. Iran has been effectively sidelined for years under sanctions. Even talk of a deal can move the price. Add to that some demand concern — the CPI data from April showed inflation still sticky at 332.4 on the index, and core CPI even higher at 335.4. That weighs on expectations for economic activity and oil demand. Luna: And yet, natural gas isn't following that script. Why? Lucas: Natural gas is much more of a domestic market in the US, and its drivers are different. Henry Hub prices have been hovering around three dollars per MMBtu. That's low by historical standards, but we're entering summer — cooling demand season. And storage levels, while adequate, aren't as bloated as they were earlier this year. Luna: So the nat gas market is looking ahead to higher demand from air conditioning, while oil is worrying about a supply surge from Iran and a potentially slower economy. Lucas: That's the core of it. And you can see the divergence play out in the energy sector stocks, too. The XLE, the energy select sector ETF, is down about 1.8 percent over the past five days. Not a crash, but not flat either. The big oil producers like Exxon and Chevron are down more — Exxon off 3.5 percent, Chevron 1.5 percent. Luna: But then you have the clean energy side of the equation. The Invesco Solar ETF, TAN, is up more than five percent over the same period. Enphase Energy alone surged nearly 29 percent. Lucas: That's a fascinating contrast. The market seems to be making a bet that lower oil prices reduce the urgency for renewables, but also that any economic slowdown might push investors toward growthier clean energy names as a long-term play. It's not a clean narrative. Luna: No, it's messy. And for listeners who are trying to make sense of it, what's the one number to watch? Lucas: I'd say keep an eye on the gasoline price at the pump. The most recent reading had regular gas at four dollars and forty-nine cents a gallon. That's down just a penny from the prior week, even though crude has fallen sharply. If crude stays lower, gas should eventually follow, and that would be a real boost for consumer sentiment. Luna: But if the Iran deal doesn't materialize, or if it gets delayed, oil could snap back quickly. Supply fears would reignite. Lucas: Right. And that's why the divergence between natural gas and oil might not last. If oil rebounds, the whole energy complex could move together again. But for now, the market is telling us that these two commodities are responding to different sets of forces. Luna: And speaking of forces — the forces that keep this show independent and ad-free — we want to mention something quickly. Lucas: Yeah. If you find yourself thinking about energy markets a little differently after listening to us — maybe you noticed the gas price sign on your way to work, or you checked the XLE — that's exactly the kind of engagement that makes this show possible. Luna: We keep Energy Economics ad-free and focused on the numbers because listeners like you support it directly. If that model works for you, you can help out at buy me a coffee dot com slash fexingo. Lucas: Seriously, it makes a difference. And now, back to the divergence question. One more factor I want to bring in — the ten-year breakeven inflation rate ticked up to 2.40 percent on Friday. That suggests the bond market still expects inflation to stay above the Fed's target, which complicates the outlook for both oil and natural gas. Luna: Higher breakevens usually mean higher expected inflation, which can push commodity prices up as a hedge. But if the economy slows, demand drops. So which force wins? Lucas: For natural gas, I think it's the summer demand story that wins in the near term. For oil, it's all about the Iran negotiations and OPEC's next move. The next few weeks will tell us a lot. Luna: And for listeners, the key takeaway: don't assume energy moves as one block. Right now, natural gas and oil are telling very different stories. Lucas: Exactly. Keep your eyes on the pump price, on the Henry Hub quote, and on any headlines out of Vienna or Washington. That's where the next move will come from.