Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Stocks Are Falling as Iran Deal Nears
Transcript
- Lucas: So WTI crude has fallen about 7 percent in the last five days, and Brent is down a similar amount. And yet, at the same time, Brent is still trading near 98 dollars a barrel. That is a pretty weird combination—sharp weekly drop, but still at elevated levels. Luna: Right, it feels like the market is pricing in a big event that hasn't actually happened yet. Lucas: Exactly. And that event is an Iran nuclear deal. The headlines today are saying a signing is likely in the coming days, but not 100 percent certain. The market is basically front-running a return of Iranian oil to global markets. Luna: So how much Iranian oil are we talking about here? Because that's the key question. Lucas: Iran currently has about 1.5 million barrels per day of spare production capacity that could come back relatively quickly if sanctions are lifted. But it's not just production—it's also the floating storage. There are an estimated 50 to 60 million barrels of Iranian crude sitting on tankers right now, ready to be sold. Luna: So that's a potential flood of supply, but the market has been tight. I mean, Brent was above 95 for weeks. Lucas: Yeah, and that's why the drop is so sharp. The market was already worried about supply constraints, and now suddenly there's a credible prospect of additional barrels. The thing is, oil prices are not just about supply and demand today. They're about expectations. And the expectation of Iranian barrels hitting the market in the next few months is enough to knock 7 percent off the price in a week. Luna: But then why are oil stocks falling even more? Exxon is down almost 3 percent this week, Chevron down 1 percent. That's not just a mirror of crude. Lucas: Good point. Oil stocks have their own dynamic. The XLE, the energy sector ETF, is down about 1.1 percent in five days. But some of that is a valuation reset. When oil prices drop, the market revises down its estimates for future earnings at these companies. And with Exxon and Chevron, they've been huge cash machines, paying big dividends and buybacks. A lower oil price means less cash flow. Luna: And there's also the fact that the Iran deal isn't the only thing moving markets. The SpaceX IPO today is sucking up a lot of attention and capital. I saw that SpaceX popped 30 percent on its first day, market cap over two trillion. Lucas: That's a massive distraction, but I think it's a separate story. For energy markets, the Iran deal is the dominant factor. Now, let's talk about what happens if the deal actually goes through. The conventional wisdom is that it would be bearish for oil. But the market has already priced in some of that. If the deal falls through, oil could spike back up. Luna: So you're saying the 7 percent drop is a 'deal premium' that could be unwound? Lucas: Exactly. And that's why a lot of traders are watching for headlines. The next few days will be critical. If the deal is signed, we could see another leg down. If it stalls, expect a bounce. Luna: But there's another layer here: natural gas and clean energy. Henry Hub natural gas is barely moving, down about 1 percent. And the clean energy ETF ICLN is flat. Enphase, though, is down 5 percent this week. That's a big move for a solar company. Lucas: Enphase has its own issues, I think. They've been under pressure from high inventory and slower demand. But the broader point is that oil prices don't move clean energy stocks in a simple way. Lower oil might reduce the incentive for renewable adoption in some contexts, but it also lowers input costs for manufacturing. The relationship is messy. Luna: And then there's inflation. The CPI data from May showed headline inflation at 334, up from 332.41. Core CPI also ticked up. But the ten-year breakeven inflation rate actually dipped to 2.29 percent. So the market seems to think that lower oil will help cool inflation. Lucas: That's a key signal. If the Iran deal leads to sustainably lower oil prices, that could take some pressure off the Fed. And that would be bullish for growth stocks. But it's not that simple. Lower oil also means lower revenues for energy companies, which is a big part of the economy. Luna: So what's your base case for oil over the next month? Lucas: I think we're in for a volatile period. The deal is the dominant variable. If it goes through, WTI could test 80 or even lower, because you also have the OPEC+ meeting coming up where they might adjust quotas. If it falls apart, we're back to 95 or higher. The range is wide. Luna: And you think the market is overreacting either way? Lucas: Not overreacting, but pricing in a binary outcome. That's rational. The problem is that the probability is uncertain. If you're an investor, you have to decide whether to hold energy stocks through this or reduce exposure. I don't have a strong view, but I'd say the risk is skewed to the downside for oil in the near term. Luna: Alright, let's take a quick beat here. If this kind of analysis is useful to you, if walking through the economy with us has made something click, that's exactly the kind of thing that keeps this podcast going. We don't run ads, and that's a deliberate choice. The way we stay ad-free is listener support. So if you find value in these episodes, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that makes a big difference for us. Lucas: Yeah, it really does. And we appreciate everyone who chips in—it's what lets us keep drilling into these topics without interruption. So thank you. Luna: Back to oil. So let's say the deal happens. What does that mean for the energy sector long-term? Lucas: Long-term, it's a reminder that the energy transition is not linear. Oil will still matter for years. But the Iran deal could accelerate a shift in capital allocation. If oil prices stay lower, oil companies might cut back on investment, which could lead to tighter supply later. That's the classic oil industry cycle. Luna: And for clean energy, lower oil could reduce the urgency for policy action, which isn't great for renewables. Lucas: Exactly. But again, it's not a simple relationship. Lower oil means lower gasoline prices, which is good for consumers and the overall economy. That could boost demand for everything, including solar panels. But in the near term, the market is fixated on the deal. Luna: One more thing: the breakeven inflation rate dipping. Does that signal that the market thinks the Fed might ease off? Lucas: Possibly. If oil stays lower, headline inflation should moderate. The Fed's preferred measure, core PCE, is still elevated at 129.6, but lower energy costs would help. So the bond market is pricing in a little less inflation risk. That's supportive for stocks in general, but not specifically for energy. Luna: So to sum up: oil is down on Iran deal hopes, but still high historically. Energy stocks are slipping, but not crashing. Clean energy is mixed. And the inflation outlook is improving slightly. Lucas: That's a fair summary. I think the key takeaway is that the next few days will be decisive. Watch the headlines from Vienna or wherever the talks are happening. And don't assume the price move is over—the range of outcomes is still wide. Luna: Great. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners for joining us. We'll be back with more next time.