Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Tops 98 Dollars as Tanker Strikes Reshape Risk
Transcript
- Lucas: Oil just crossed ninety-eight dollars a barrel. That is the headline number from this morning — WTI crude touched ninety-eight forty before settling back a bit. And it's a direct reaction to the Houthi strikes on Saudi oil tankers that hit overnight. Luna: I saw the headline — 'Oil tops $98 after tankers struck off Saudi Arabia.' But WTI was around eighty-four dollars just a week ago. That's a fourteen-dollar jump in seven days. Is this purely a risk premium, or is there actual supply being taken offline? Lucas: Great question. Let's separate the two. The strikes themselves didn't destroy a huge amount of capacity — Saudi Aramco says its loading operations are mostly unaffected. So you're right, this is primarily a risk premium. Traders are pricing in the possibility that the Strait of Hormuz could get disrupted, or that Saudi retaliation escalates the conflict. Luna: But a risk premium of that size — ten to twelve dollars — feels outsized for a single event. Lucas: It does, and that's where the context matters. Look at the five-day move: WTI is up 7.9 percent. But Brent crude — which is the international benchmark — is up only 3.1 percent over the same period, and it actually fell a bit this morning to around eighty-seven. So the market is pricing the disruption very specifically to the WTI contract, which is more exposed to Gulf of Mexico and US Gulf Coast refining. The Houthi strikes affect Red Sea and Saudi routes, which logically should hit Brent more. But the speculative positioning in WTI futures was already heavily short coming into this week, so the squeeze is bigger. Luna: That's a really helpful distinction. So the move in WTI is partly fundamentals — the actual strike — and partly a positioning-driven squeeze. Lucas: Exactly. And the fact that Brent is lagging suggests the 'real' oil market is less panicked than the futures market. Inventories are still comfortable. The EIA reported last week that US crude stockpiles are about 5 percent above the five-year average. So there's no physical shortage yet. Luna: But the gasoline price is already reflecting it. Regular gas is now at four dollars a gallon nationally, up from three eighty-five last week. That's a fifteen-cent jump in seven days. Lucas: Right, and that's the direct pass-through for consumers. Refineries are buying crude at ninety-eight dollars, so they're charging more at the pump. And this is happening just as the summer driving season peaks. You can bet that's going to show up in the next CPI print, even though core inflation has been cooling. The headline CPI might get a bump from energy. Luna: Speaking of the data — we got the June CPI a few weeks ago, and it showed headline inflation at 332.6, down from 333.98. So the trend is still disinflationary. But a sustained oil spike could reverse that. Lucas: It's one of those situations where the market has to decide which narrative wins. Do we get a quick de-escalation — maybe a ceasefire, maybe Iran pushes the Houthis to stand down — and oil falls back to the mid-eighties? Or does this spiral into a broader conflict that disrupts Hormuz, in which case a hundred-twenty dollars is not out of the question. Luna: And the administration's response matters too. The Trump administration has been escalating threats against Iran. Secretary Rubio said this morning that Iran isn't ready to make a deal. So we're in a standoff. Lucas: Yeah, the diplomatic channel seems frozen. And that's why the risk premium is sticky. Traders aren't going to unwind their long positions until they see concrete signs of de-escalation — not just tweets, but actual ship movements and port reopenings. Luna: Let me bring this back to energy stocks, because the equity market is reacting even more sharply than the oil price itself. ExxonMobil is up 5.8 percent this week, Chevron 5 percent, ConocoPhillips 5.3 percent. The XLE energy sector ETF is up 3.8 percent. Lucas: The stocks are pricing in something more durable. When you see a five-plus percent move in Exxon in a single week — that's about thirty billion dollars of market cap added to one company. The market is saying: high oil prices are going to persist long enough to boost earnings for multiple quarters. It's not just a one-day spike. Luna: And the independent producers are getting an even bigger boost. The XOP, which tracks the S&P Oil & Gas Exploration & Production ETF, is up 6.1 percent. Those companies are more levered to the spot price because they have less hedging in place. Lucas: Exactly. The integrated majors like Exxon have refining and chemical businesses that can hedge some of the crude volatility. But a pure-play E&P company — if oil goes from eighty to ninety-eight, their cash flow goes up by about 20 percent almost instantly. Luna: You know, it's interesting to compare this to the clean energy space. The iShares Global Clean Energy ETF, ICLN, is only up 1 percent this week. And the solar ETF TAN is actually down 0.8 percent. Enphase Energy is down 3.7 percent. Lucas: That divergence tells you that this oil shock is not seen as a catalyst for renewables. If anything, higher energy costs could slow the economic growth that funds clean energy investment. And with interest rates still elevated — the ten-year breakeven inflation rate ticked up to 2.28 percent — capital-intensive solar projects face higher financing costs. Luna: So the trade right now is clear: oil stocks are the safe haven within energy. But I wonder if that lasts. If the geopolitical situation de-escalates quickly, those stocks could give back all the gains. Lucas: That's the risk. And it's a real one. We've seen this pattern before — a spike, then a fade. The question is whether this time is different because of the broader geopolitical backdrop. The Houthi attack is not an isolated event. It's part of a coordinated campaign that's linked to Iran's nuclear standoff. So the probability of a sustained disruption might be higher than in past one-off incidents. Luna: Speaking of probabilities — I want to ask you something. When you're looking at this kind of event, how do you personally separate the signal from the noise? Because every oil spike feels existential in the moment. Lucas: I look at the structure of the futures curve. If the backwardation is widening — meaning spot prices are way above forward prices — that tells me the market sees a temporary disruption. If the curve starts to flatten or even go into contango, where futures are above spot, that suggests a more structural supply issue. Right now, the curve is still steeply backwardated, which leans toward the temporary-disruption camp. Luna: That's a great lens. I'm going to start watching the curve myself. Lucas: It's a helpful tool. And it keeps you from getting swept up in the headline drama. Luna: You know, this kind of analysis is exactly why I love doing this show. We spend so much time digging into how the economy actually works — the real drivers behind the numbers. Lucas: And we try to keep it ad-free and independent because we think that's the right way to do it. If you're finding value in these conversations — if walking through the energy economy with us has made something click — the simplest way to support that is a one-time coffee. Just head to buy me a coffee dot com slash fexingo. No subscription, no upsell. It's the smallest possible vote of confidence, and it genuinely helps us keep doing this. Luna: Yeah, I think that's a fair ask. If today's episode was worth a few minutes of your time, it's worth a couple bucks. And it goes right back into research and production. Lucas: Alright, back to the oil market. So we've got crude at ninety-eight, gasoline at four dollars, energy stocks surging. But there's another angle I want to explore: the impact on the broader economy. At ninety-eight dollars oil, the US is spending roughly an extra hundred fifty million dollars a day on imported crude compared to a month ago. Luna: That's a massive wealth transfer from consumers to producers. And it comes at a time when retail sales are already softening. Higher gas prices act like a tax on disposable income. Lucas: Right. Every ten-dollar increase in oil typically shaves about 0.2 to 0.3 percent off GDP growth over a year. So if oil stays at ninety-eight or goes higher, you're looking at a meaningful drag on consumer spending in the second half of 2026. Luna: And that's before you factor in the Federal Reserve. If headline inflation ticks up because of energy, the Fed might hold rates higher for longer. The market is already pricing in no cuts for the rest of 2026. Lucas: Exactly. So the oil spike creates a tricky feedback loop. It's bullish for energy stocks, but bearish for the broad market. You saw that this morning — the S&P 500 futures are down slightly, even as energy is up. Traders are rotating out of tech and into oil. Luna: We also saw Tesla and Alphabet shares slump in premarket on AI spending concerns. So there's a lot of crosscurrents. But for our listeners who focus on energy, the key takeaway is: watch the curve, watch the diplomacy, and don't assume this spike is permanent — but also don't assume it's fleeting. Lucas: Well said. We'll be tracking this all week. If the situation escalates, we'll do a follow-up episode. And as always, thanks for spending part of your morning with us. Luna: See you next time.