Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Oil Is Ignoring The Economic Slowdown
Transcript
- Lucas: If you’ve been watching the broader market this week, you might have noticed a strange disconnect. The Nasdaq took a hit recently, dropping more than two percent on worries about AI spending and general economic cooling, yet oil is holding up near ninety-nine dollars a barrel for West Texas Intermediate. It feels counterintuitive when so much of the data suggests we’re slowing down. Luna: Right, and it’s not just oil. You look at the ten-year breakeven inflation rate, which dipped to two point three two percent yesterday, suggesting people think price pressures are easing. So why does energy still feel like it’s charging ahead? Lucas: That’s the core puzzle. Usually, when growth slows, you see demand destruction in energy. But right now, we’re seeing a structural supply constraint that’s overriding weak demand signals. Brent crude is actually up slightly over the last five days, sitting around one hundred and twelve dollars, which is interesting because WTI has dropped a bit more aggressively. Luna: So you’re saying the gap between Brent and WTI is telling us something about where the actual tightness is? I was thinking more about the OPEC+ meetings, but maybe the geographic spread matters more here. Lucas: Exactly. The OPEC+ decision to extend production cuts into next year is the baseline story everyone knows. But the real driver is the non opec supply gap. Countries like Brazil and Guyana are ramping up, but they aren’t filling the void left by declines in places like Nigeria and Angola. And then you have the geopolitical risk premium baked into every contract. Luna: It’s almost like the market is pricing in a worst-case scenario for supply rather than best-case for demand. Which sounds exhausting for anyone running an airline or a logistics company. Lucas: It is exhausting, and it’s why we’re seeing these divergent trends across different raw materials. Let’s take a quick breath though, because before we dive deeper into the mechanics of this squeeze, I want to mention how this show stays running. Luna: Yeah, we don’t run ads, so it’s just listener support. If walking through the economy with us has made something click, a handful of folks chip in monthly through buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: It keeps the lights on and allows us to dig into these numbers without chasing clicks. Thanks for keeping the signal clear. Now, back to the gridlock. When you look at the CPI data from September, the all urban consumer index ticked up to three hundred thirty-six point three, but core CPI ex food and energy only moved to three hundred thirty-eight point nine. Luna: So goods prices are sticky, but services are where the heat is? That usually means wage pressure is still the main villain there, not necessarily raw material costs driving everything up. Lucas: Precisely. The PCE price index, which the Fed watches closely, rose to one hundred thirty-one point six in August. Core PCE is at one hundred thirty point five. These are slow, steady climbs, not explosive spikes. But when you layer high oil prices on top of that, you get a specific kind of friction in the manufacturing sector. Luna: I saw some headlines about cotton prices soaring recently too. Does that fit into this same pattern of isolated supply shocks, or is it part of a broader agricultural trend? Lucas: Cotton is its own beast, largely driven by weather patterns in the US South and policy shifts in India. But if you look at wheat, it’s down four percent over the last five days to six hundred twenty-nine. So agriculture is actually softening. It’s really the energy and metals that are fighting against the slowdown narrative. Luna: That’s a key distinction. Energy and metals are input costs for almost everything else. If those stay high, it acts like a tax on efficiency. Are we seeing any pullback in industrial demand yet, or are factories just absorbing the cost? Lucas: Factories are absorbing it, but barely. The PMI data for manufacturing has been hovering around fifty-two, which is expansionary but barely. They’re cutting inventory levels instead of building them up. It’s a defensive posture. Companies aren’t buying steel or aluminum for future growth; they’re buying just enough to keep the line moving. Luna: So it’s a liquidity squeeze disguised as a demand problem. They have the orders, but the margin compression from energy costs is making them picky about what they produce. Lucas: That’s a great way to put it. And this brings us to the dollar. When the dollar strengthens, commodities priced in dollars should theoretically fall. But we’re seeing resilience. Copper, for instance, is down only two percent recently, trading around six dollars and forty cents. Silver is down four percent, but gold is also correcting, sitting at four thousand thirty-six. Luna: Gold dropping alongside oil is unusual. Usually, if fear drives oil up due to geopolitics, gold acts as a safe haven and goes up too. Here, both are pulling back. What’s happening with investor sentiment? Lucas: It’s likely profit-taking after the rallies earlier in the quarter. Investors are rotating out of hard assets into cash or bonds as they wait for clearer signals on interest rates. The bond market is pricing in a gradual cooling, which removes the urgency to hold commodities as insurance. Luna: But the physical reality hasn’t changed. The pipelines are still constrained, the ships are still waiting, and the producers haven’t brought back idle capacity. How long can this disconnect last? Lucas: History suggests it lasts longer than economists predict. We saw this in the early nineties and again in the late two thousands. The market waits until a genuine shortage hits, and by then, the damage to margins is done. Right now, it’s a slow bleed rather than a sudden crash. Luna: So for a CFO listening in, the advice isn’t to hedge aggressively right now, but to lock in contracts where possible? Because volatility is still high even if the trend is flat. Lucas: Absolutely. Volatility is the product right now. The five-day move for natural gas was nearly ten percent, which is massive. For anyone relying on stable input costs, that unpredictability is more dangerous than the price level itself. You need flexibility in your supply chain. Luna: Flexibility over efficiency. That’s a tough pill to swallow for companies that spent years optimizing for lean operations. Now they have to pay a premium for redundancy. Lucas: Exactly. And that premium is showing up in the stock prices of energy majors. Exxon is trading near one hundred seventy-eight dollars, Chevron around two hundred twenty-six. They’re benefiting from the capex discipline of the last few years. They didn’t overbuild, so they’re earning higher returns on existing assets. Luna: It’s funny how restraint pays off in commodities. In tech, you’re supposed to spend big to grow. In oil, you spend less and let scarcity do the work. Lucas: That’s the paradox. Tech wants network effects; oil wants scarcity. Both strategies can work, but they require totally different mindsets from management. The oil CEOs are playing a game of patience, knowing that new projects take a decade to come online. Luna: So even if demand drops tomorrow, the supply side is locked in for a while. There’s no switch to flip. That makes the current price floor quite solid, doesn't it? Lucas: Very solid. Unless there’s a major geopolitical escalation that disrupts shipping lanes, or a sudden surge in Chinese demand that surprises everyone, the range seems set. Ninety-five to one hundred fifteen dollars for WTI looks like the new normal for the next quarter. Luna: A quiet normal for such volatile inputs. Do you think this will eventually force a shift toward renewables faster, or are companies just accepting the tax? Lucas: They’re accepting the tax, but they’re accelerating electrification in parallel. It’s not either-or. High fossil fuel prices make the ROI on solar and wind look better, so investment flows there even without subsidies. It’s a slow grind toward diversification. Luna: Grinding away at the dependency. One step at a time, funded by the very prices we’re complaining about. It’s a messy transition, but at least it’s moving. Lucas: It is. And as long as the geopolitical landscape remains fractured, that friction will stay. We’ll keep watching the spreads between Brent and WTI, and the inventory reports, to see if that balance starts to tip. Luna: Keep your eyes on the spreads. We’ll be here to interpret them when the next data dump comes in. Lucas: Sounds like a plan. Until then, stay sharp with your margins.