Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Clean Energy ETFs Are Falling While Oil Rallies
Transcript
- Lucas: Oil prices are up more than five percent in the last five days. West Texas Intermediate crude is just shy of 72 dollars a barrel as of this morning. But if you look at the clean energy space—the iShares Global Clean Energy ETF, ticker i c l n, is down nearly two percent over the same stretch. The Invesco Solar ETF, T-A-N, is off more than two percent. Luna: And this isn't a one-day blip. We've seen this pattern for weeks now—oil rallies, solar stocks drop. What's driving it? Lucas: It's a combination of at least three forces moving in opposite directions. First, the oil rally itself has a geopolitical catalyst. The U.S. is still in technical talks with Iran, but President Trump recently said the ceasefire was 'over.' That reintroduces supply risk. Brent crude is at 76 dollars a barrel for forward delivery, up almost six percent in five days. Luna: So oil is spiking on uncertainty about Iranian exports coming back online. That part makes sense. But why would that hurt clean energy stocks? Lucas: It wouldn't—directly. The correlation between oil and solar stocks has been weak for a while. The real headwind for renewables right now is interest rates. The ten-year breakeven inflation rate—basically the market's expectation for future inflation—dropped to 2.23 percent on July 9th, down from 2.25 percent. That sounds small, but when inflation expectations fall, real interest rates tend to rise. And clean energy companies are very sensitive to higher real rates. Luna: Because they have high upfront costs and long payback periods. A higher discount rate crushes the present value of future cash flows. Lucas: Exactly. Solar projects, wind farms, battery storage—they cost a lot to build, and the revenue comes in over twenty or thirty years. When rates go up, those distant cash flows are worth less today. So stocks like Enphase and First Solar take a hit. Enphase is actually up four percent in the last five days, but that's after being down seven percent the week before. First Solar is up about two percent. So they're bouncing, but the trend is still lower. Luna: And then there's natural gas. Henry Hub is at 3.02 dollars per million BTU, down more than seven percent over the last five days. That's a big drop. Lucas: It is. And cheap natural gas is direct competition for renewables in the power generation mix. When gas prices fall, gas-fired power plants become more economical relative to solar and wind. That puts downward pressure on clean energy stocks, especially utility-scale solar developers. Luna: So we have oil rallying on geopolitics, rates weighing on renewables, and gas getting cheaper—all at the same time. That's a pretty clear recipe for divergence. Lucas: It is. And the data bears it out. The S&P 500 energy sector, XLE, is up three percent in the last five days. The oil and gas exploration ETF, XOP, is up three point one percent. Exxon is essentially flat, but Chevron is up nearly three percent, ConocoPhillips up three percent. Meanwhile, NextEra Energy, the big utility with a huge renewable portfolio, is down one point four percent. Luna: That's a pretty stark contrast. NextEra is often seen as a bellwether for the clean energy transition. If it's falling while oil stocks rise, that sends a signal. Lucas: It does. And it raises a question for investors: is this a temporary divergence driven by macro factors, or is something more structural going on? Let's look at the inflation data. The May CPI came in at 334.0, up from 332.41 in April. Core CPI, which excludes food and energy, is at 336.1, up from 335.42. So inflation is still sticky, but the market is pricing in lower breakevens. That suggests the Fed might not cut rates as soon as hoped, which is bad for growth stocks and especially bad for capital-intensive renewable energy. Luna: And if rates stay higher for longer, the cost of capital for these projects stays high. That's a direct headwind. Lucas: Right. Meanwhile, oil producers are generating strong cash flows at current prices. WTI crude is at 69.60 dollars a barrel as of July 6th, which is down from the recent spike but still profitable for most U.S. shale producers. They're returning cash to shareholders through dividends and buybacks. That's a different story than a solar developer that needs to keep raising capital. Luna: So it's almost like two different market regimes playing out at the same time. The oil market is driven by supply disruptions and geopolitical risk, while clean energy is being priced by the macro rate environment. Lucas: That's exactly right. And the result is that the old correlation—where higher oil prices would lift all energy stocks, including renewables—has broken down. Investors who bought clean energy as a hedge against oil prices have been disappointed. Luna: Speaking of which, I've been thinking about that. If you're building a portfolio today, do you even treat oil and renewables as part of the same sector anymore? Lucas: I think the answer is increasingly no. They respond to different drivers. Oil is about supply constraints, OPEC+ decisions, geopolitical flashpoints. Renewables are about technology costs, policy support, and the cost of capital. They're both energy, but they're not the same asset class. Luna: So if someone wants exposure to the energy transition, they need to be intentional about it. Not just buy an energy ETF and assume it covers both. Lucas: Exactly. And that's actually a good place to step back and think about what we're doing here. If walking through the economy with us has made something click—or if this kind of analysis saves you from making a portfolio mistake—that's the whole point. And honestly, if today was worth a coffee to you, there's a link—buy me a coffee dot com slash fexingo. It's how we keep the show ad-free and focused on the numbers. Luna: Yeah, it's a small way to support the work. And it genuinely makes a difference. Lucas: So back to the divergence. One thing I'm watching is whether the oil rally can sustain itself. The headlines about Iran are fluid. If negotiations resume and Iranian exports come back, oil could give back those gains. And if oil falls, does that drag down clean energy too? Probably not, because the drivers are different. Luna: But if oil falls on a broader risk-off move—say, recession fears—then clean energy would likely fall too, because that's a macro shock. Lucas: Right. So the divergence isn't a guarantee. It's conditional on the macro environment staying stable. If we get a recession, correlations converge again. But in the current environment—moderate growth, sticky inflation, geopolitical noise—I think the decoupling persists. Luna: So for listeners, the takeaway might be: don't assume oil and renewables move together. Look at what's actually driving each. Lucas: Exactly. And keep an eye on the ten-year breakeven rate. If that starts moving up again—meaning inflation expectations rise—that could be a tailwind for oil and a headwind for renewables, because it would push real rates higher. But if it falls further, the opposite could happen. Luna: So the real story isn't just oil versus solar. It's about inflation expectations, interest rates, and geopolitics all intersecting. Lucas: That's the energy economics of 2026 in a nutshell. And we'll keep tracking it.