Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Natural Gas Is Diverging from Oil in July 2026
Transcript
- Lucas: So oil has had a nice run this week—WTI up about four and a half percent in five days, Brent even more—but natural gas has gone the other way, dropping more than seven and a half percent. Luna: That is a pretty stark divergence. Oil and gas usually move together, at least directionally, but right now they're in completely different narratives. Lucas: Right. And the gap is worth unpacking, because it tells us something about the specific supply and demand dynamics in each market. Oil's rally is mostly geopolitical—there's been a lot of noise out of the Middle East, plus the Iran export story that we talked about a few episodes back. Luna: But gas is a more domestic story. Henry Hub is at three dollars per million BTU, down from over three-twenty just a week ago. Lucas: Exactly. And that drop is happening despite summer cooling demand, which normally supports prices. So what's going on? Let's look at storage first. We're coming out of a winter that wasn't particularly cold, and storage levels across the US are well above the five-year average. Luna: Right, the Energy Information Administration reported that working gas in storage is something like 16% above the five-year high for this time of year. Lucas: That's a big cushion. When you have that much gas in the ground, it takes a significant demand shock or a supply disruption to move prices much. And we haven't had that. Production has been relatively steady, even as the rig count has drifted lower. Luna: So the storage overhang is really capping any upside, even with summer heat driving air conditioning load. Lucas: Right. And the heat this summer hasn't been as extreme as last year, at least not across the major population centers. So power burn—the amount of gas used for electricity—is up, but not dramatically. Luna: Meanwhile, LNG exports have been a big story for years, but there's a nuance there too. Freeport LNG is back online after its 2022 fire, but total export capacity is still constrained by the timeline of new terminals. Lucas: That's the key. LNG exports are the main demand driver that could tighten the market, but new capacity like Venture Global's Plaquemines facility isn't fully ramped yet. So the export pull isn't strong enough to eat through that storage surplus. Luna: And European gas prices have come down a lot too, so the arbitrage for sending LNG abroad isn't as juicy as it was in 2022. Lucas: Right. So you have a domestic market that is well supplied, with exports that are growing but not fast enough, and mild weather. That combination is a recipe for low and volatile prices. Oil is a different animal entirely. Luna: Oil is more globally integrated, and the supply constraints are real. OPEC+ is still holding back barrels, and US production growth has hit a wall—we did an episode on that. Lucas: We did. And that wall is partly geological—the Permian Basin isn't the infinite resource it was a few years ago. But it's also financial: publicly traded E&P companies are still prioritizing returns over growth. They're not drilling like it's 2018. Luna: So oil gets a geopolitical risk premium and a capital discipline premium, while gas is stuck with a storage overhang and a weather dependency. Lucas: Exactly. And that divergence matters for investors. Look at the XLE, the energy sector ETF—it's up three and a bit percent this week, driven by the oil-heavy names like Exxon and Chevron. But the gas-weighted producers, like some of the smaller independents, are lagging. Luna: And the clean energy ETFs like ICLN and TAN are actually down this week, so the whole energy complex is really fragmented right now. Lucas: It is. And for the consumer, low gas prices are a silver lining. The national average for regular gasoline is down a nickel from last week, to three seventy-eight a gallon. That's partly because gas is cheap, since it's a feedstock for power generation and industrial processes. Luna: Which feeds into the inflation story too. Core CPI is still sticky, but energy prices are a disinflationary force at the moment. Lucas: Right. The ten-year breakeven inflation rate is at two twenty-five, pretty flat. So the market isn't panicking about energy-driven inflation. But if oil keeps rallying and gas stays cheap, that spread could persist. Luna: I want to come back to something you said about capital discipline. The E&P companies are generating a ton of free cash flow at current oil prices, but they're not reinvesting it in drilling. They're buying back stock and paying dividends. Lucas: That's been the mantra for the last four years, and it's not changing. ConocoPhillips and Chevron are both in the news for buybacks. And that's fine for shareholders, but it does mean that US oil production growth is structurally lower than it was a decade ago. Luna: So the oil market remains tight on the supply side, while gas is loose. That's a recipe for the kind of divergence we're seeing. Lucas: Exactly. And one more thing: look at the futures curve for natural gas. It's in contango—future months are higher than spot. That tells you the market expects prices to recover later this year, probably on winter heating demand. But for now, it's a grind. Luna: Contango means storage is profitable, which encourages people to keep gas in the ground. That just reinforces the storage surplus. Lucas: Right. So the near-term outlook for gas is weak, but if we get a cold winter or a faster ramp in LNG exports, the picture could flip quickly. That's the nature of a commodity with low demand elasticity and high storage costs. Luna: And for listeners who are trying to position portfolios, it's really about picking your niche. Oil stocks are benefiting from a macro tailwind; gas stocks are more of a wait and see. Lucas: Yeah, I think that's fair. And if today's episode helped you make a bit more sense of these markets—you know, if it was worth a coffee to you—we've got a page at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small thing, but it really helps us keep this ad-free and focused on the numbers. Lucas: So that's the link if you feel inclined. Now, back to the divergence—one more angle I want to touch on is the impact on utilities. Companies like NextEra Energy, ticker n e e, are down about one and a half percent this week. Luna: That seems counterintuitive. Low gas prices should lower their input costs for gas-fired generation. Lucas: You'd think so. But NextEra is mostly a renewable and regulated utility play. Low gas prices actually hurt the economics of their wind and solar projects in the short term, because power prices are lower in wholesale markets where gas sets the marginal price. Luna: Ah, so cheap gas undermines the competitiveness of renewables in power markets. Lucas: Exactly. And that's part of why the clean energy ETFs are down even as oil rallies. It's not a clean 'good for energy, bad for green' story. It's more nuanced. Luna: So the message today is: oil and gas are diverging, and within energy, you've got three or four different micro-markets all moving on their own fundamentals. Lucas: That's exactly right. And understanding that divergence is the first step to making sense of the price action. For now, gas is cheap, oil is not, and the spread tells a story about storage, geopolitics, and capital discipline. Luna: And we'll keep watching it. Thanks, Lucas. Lucas: Thanks, Luna. That's it for today's Energy Economics.