Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Falling While Stocks Hold Steady
Transcript
- Lucas: So oil had a week. WTI crude dropped more than 10 percent in the last five trading sessions, settling Friday at just under 97 dollars a barrel. Brent not far behind, down almost 10 percent, hovering around 100. Luna: That's a big move. But when I look at the energy sector ETFs, XLE only fell about 1.8 percent over the same stretch. ExxonMobil down 3.5, Chevron down 1.5. That's not nothing, but it's not a crash. Lucas: Right, and that's exactly the puzzle I want to unpack. Because if you just saw the crude number — 10 percent in a week — you'd assume energy stocks got crushed. But they didn't. The divergence tells us something about what's actually happening under the hood. Luna: So what's the buffer? Are these companies just less exposed to the spot price than people assume? Luna: The risk premium. Lucas: Exactly. A lot of the price in crude over the past year has been geopolitical fear — Iran, Russia, Middle East tensions. If that fear gets priced out, the crude futures fall, but the companies themselves might not lose their fundamental earnings power. The headline President Trump put out Sunday — saying Iran negotiations are proceeding in an 'orderly and constructive manner' and warning against rushing — that's the kind of statement that removes the fear bid. Luna: So the futures market is pricing in a lower chance of supply disruption, but the equity market is saying 'these companies still make money at 85-dollar oil.' Lucas: That's the read. And it's consistent with what we saw in the economic data last week. CPI came in at 332.4 for April, up from 330.3. Core CPI ticked up too. So inflation is still sticky, and the Fed is not cutting rates anytime soon. That's a headwind for all stocks, but for energy companies, their earnings are tied more to the absolute level of oil prices than to the weekly move. Luna: And the absolute level is still high. WTI is at 97, Brent at 100. That's still historically very profitable for most producers. Lucas: Right. The breakeven for most US shale producers is around 35 to 45 dollars a barrel. So even with this week's drop, they're making money hand over fist. The stock market is looking at the cash flow, not the weekly crude print. Luna: But the oil price drop does matter for the consumer. Gasoline is still at 4.49 a gallon, but if crude stays down, that should eventually feed through to the pump. Lucas: It should, but the relationship is lagged and noisy. Refinery margins, seasonal blends, distribution costs — there's a lot between the barrel and the nozzle. But directionally, lower crude is good for the inflation narrative. The ten-year breakeven inflation rate ticked up a hair to 2.40 percent, but that's still reasonably anchored. Luna: So if the risk premium is coming out of oil, and the economy isn't collapsing, where does that leave energy stocks? Are they a buy on this dip? Lucas: It depends on your time horizon. The sector is still up huge from two years ago. Valuations are not screaming cheap. XLE trades at around 13 times forward earnings, which is about in line with the broader market. But the dividend yields are attractive — Exxon yields over 3 percent, Chevron over 4. So for income-oriented investors, the pullback might be an entry point. Luna: And for someone who just wants to play the oil price itself, would you rather own the futures or the stocks? Lucas: That's a great question. Futures are pure beta — you get the full volatility, both up and down. Stocks give you the operating leverage, the hedging, the dividends, and the management quality. Over the long term, I'd rather own a portfolio of well-run energy companies than try to time crude futures. But if you have a strong view that Iran talks succeed and oil drops another 10 percent, futures are the way to bet. Luna: And what's your view on the Iran situation? The administration seems cautious. Lucas: Cautious is the word. Trump said 'orderly and constructive' — that's not 'we have a deal.' It sounds like talks are progressing but slowly. The market may have gotten ahead of itself pricing in a quick resolution. If talks stall, oil could bounce. That's the risk for anyone short crude right now. Luna: So the big picture is: oil down 10 percent in a week, energy stocks barely budged, and the consumer might get relief at the pump eventually, but the path is unclear. Lucas: That's the story. And it's a good reminder that commodity prices and equity prices tell different stories. If you only watch the crude ticker, you miss the company-level reality. Luna: Speaking of the company-level reality — if this conversation helped you make sense of the market, and if it was worth the price of a coffee, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: It genuinely helps us keep the show ad-free and focused on the numbers that matter. So thank you to anyone who chips in. Luna: And we'll keep digging into the data. So, Lucas, one thing I want to circle back to — the clean energy side. While oil was tanking, the solar ETF TAN was up over 5 percent, and Enphase surged almost 29 percent. Lucas: That's a striking rotation. When oil falls, the narrative shifts. Investors start thinking about lower input costs for solar manufacturing, and maybe a less inflationary environment helps renewable project financing. But Enphase's move is so large it's probably company-specific too. Luna: Earnings were good, and there was a big analyst upgrade. So it's not just macro. But the divergence between oil and clean energy this week is the starkest we've seen in months. Lucas: It's a signal worth watching. If oil stays down, the clean energy trade could have more room. But if oil bounces on a geopolitics scare, that rotation reverses fast. For now, the market is rewarding the disinflation narrative. Luna: Alright, so for listeners: oil down, energy stocks steady, solar up. Keep an eye on the Iran headlines and the CPI next month. Lucas: And remember, the equity market is not the oil market. They're cousins, not twins. Thanks for spending part of your Sunday with us.