Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why WTI Dropped Below 70 as US Strikes Iran
Transcript
- Lucas: WTI crude closed at sixty-nine twenty-three on Friday, down seven and a half percent in five days. That's below the symbolic seventy-dollar mark, and the trigger wasn't an oil-field outage or a supply glut — it was US airstrikes on Iranian targets in the Strait of Hormuz. Luna: Right, and normally you'd think a military escalation in the world's most important oil chokepoint would send prices spiking. Instead, crude sold off. That tells you demand fears are overwhelming supply risk. Lucas: Exactly. The market is basically saying: we don't care if a few million barrels a day might get disrupted, because we're more worried about a recession that could wipe out far more demand. And the data supports it. The latest CPI and PCE numbers show inflation still sticky — core PCE hit one hundred thirty point one in May, up from April — but the ten-year breakeven inflation rate actually ticked down to two point two percent. Luna: Breakevens falling while inflation is still elevated? That's the market betting the Fed's tightening will eventually break something. Lucas: Right. And when the market thinks 'break something,' it sells cyclical commodities first. Crude is the most cyclical of them all. But here's where it gets interesting: gasoline prices aren't falling nearly as fast. Luna: Yeah, regular gas is still at three ninety-one a gallon, down from four-oh-five a few weeks ago. That's only about a three and a half percent drop, while WTI is down more than seven percent just this week. Lucas: That gap — the crack spread, essentially — is widening because refineries are running at lower utilization. Some have scheduled maintenance, but a few big ones in the Gulf Coast are cutting runs because they're seeing weaker diesel and jet fuel demand. So crude is getting cheaper, but the conversion cost isn't dropping as fast. Luna: Which means drivers aren't feeling the commodity slide. And that's politically sensitive with an election coming up. Lucas: For sure. But the bigger picture is really about demand. If you look at the economic indicators — factory job cuts have been accelerating, and the PMI data for May was below fifty. The economy is slowing, and oil demand is a lagging indicator. It catches up eventually. Luna: So the Strait of Hormuz headline is almost a distraction. The real story is the same one we've been tracking for the last few episodes: demand destruction from a slowing global economy. Lucas: Exactly. And I want to contrast this with natural gas, because Henry Hub is actually holding up. It's at three twenty-three, down less than one percent this week. That's remarkable resilience when crude is getting hammered. Luna: Why the divergence? Natural gas is more of a domestic fuel, less exposed to global trade routes. And with summer cooling demand kicking in, you have a seasonal floor under prices. Lucas: Right. Plus, the power sector is burning more gas this year because coal retirements have accelerated. So even if the economy slows, people still need to run their air conditioners. That's a very different demand profile from oil, which is heavily tied to industrial activity and transportation. Luna: Speaking of divergence, clean energy stocks are also getting crushed. The ICLN clean energy ETF is down around nineteen fifty, and solar names like Enphase are below forty-eight bucks. That's a multi-year low. Lucas: Yeah, and that's been a theme we've covered — higher interest rates hammer capital-intensive renewables because their cash flows are far in the future. But the sell-off this week is also about the broader risk-off mood. When recession fears spike, investors sell anything cyclical or long-duration, and clean energy is both. Luna: So we've got oil down on demand fears, nat gas steady on structural power demand, and clean energy getting hit by macro. That's a pretty clear hierarchy of how each energy source is being priced right now. Lucas: Yeah, and I think the key takeaway for listeners is: don't read the Strait of Hormuz story as 'oil up because supply risk.' The market is telling you the opposite. It's saying the demand hit from a potential recession is bigger than any supply disruption risk right now. Luna: And if the conflict escalates further, could that flip the narrative? If an actual blockade happens or a major Saudi facility gets hit, supply would physically disappear, not just be threatened. Lucas: Absolutely. That's the wildcard. But for now, the market is pricing a demand-led selloff. And honestly, that's been the pattern since mid-June. We saw WTI near seventy-nine on June twenty-second, and it's dropped almost ten dollars in five days. That's a massive move in a short time. Luna: Ten dollars in five days. That's the kind of move that usually accompanies a financial crisis or a pandemic lockdown. Not a military strike. Lucas: Right. And it's worth noting that Brent is also down, trading around seventy-one ninety-nine, a seven and a half percent weekly drop. So this is global. The whole complex is falling. Luna: Let's zoom in on the gasoline side for a second. Three ninety-one a gallon — that's still high by historical standards. What's the outlook there? Will it eventually follow crude down? Lucas: It should, with a lag. Refinery margins are still decent, so they have room to cut prices if crude stays low. But if refineries keep reducing runs because of weak diesel demand, that constrains gasoline supply. So we could see gasoline stay sticky even as crude drops further. That's the nightmare scenario for consumers: cheap oil but not cheap gas. Luna: That's a good way to put it. And it's also a nightmare for the Fed, because energy prices feed into headline inflation. If gas doesn't fall, CPI stays elevated, and the Fed can't cut. Lucas: Precisely. And you're already seeing that in the data — core services inflation is still running hot. The PCE numbers we mentioned earlier show prices still rising month over month. So the Fed is stuck. Luna: Speaking of being stuck, I want to pivot to something you mentioned earlier — the clean energy selloff. It feels like that sector is getting no love from any angle: high rates, recession fears, and now oil prices falling which reduces the urgency for renewables. Lucas: Yeah, it's a triple whammy. But here's the contrarian take: if oil prices stay low for a while, it actually hurts the economics of new renewable projects less than you'd think, because the levelized cost of solar and wind is already competitive with gas and coal. The bigger headwind is financing costs, not the price of alternative fuels. Luna: That's a good point. So the clean energy rout is more about macro rates than about oil competing on price. Lucas: Right. And on that note, I want to take a quick step back. We've been doing this show for over a year now, and one thing that's kept it going is that a small number of listeners support us directly. If you've found our breakdowns useful — whether it's on oil, natural gas, or the broader economy — you can chip in at buy me a coffee dot com slash fexingo. That's what keeps this show ad-free and independent. Luna: Yeah, it really makes a difference. We don't have a big corporate sponsor, so every contribution helps us keep digging into these numbers without chasing clicks. Lucas: Alright, back to the data. So where do we go from here? I think the key level to watch is WTI at sixty-eight. If it breaks below that, you could see a quick move to the mid-sixties. That would be a twenty percent drop from the June high, which is technically a bear market for oil. Luna: And if we do get to sixty-five, what's the impact on the broader economy? Gasoline below three fifty? That would be a big stimulus for consumers. Lucas: It would be, but the flip side is that oil below sixty-five usually signals a pretty severe recession. Historically, every time oil has fallen that fast outside of a supply-driven event, it's been a leading indicator of a downturn. So you'd be getting cheaper gas, but also job losses and lower investment. Luna: So cheap oil is a double-edged sword. Great at the pump, terrible if it's because the economy is tanking. Lucas: Exactly. And that's the conversation the market is having right now. Are we heading for a soft landing or a recession? The oil curve is saying recession. The breakeven inflation rate is saying the same. But the equity market is still pricing in a soft landing. Something has to give. Luna: And the geopolitical wildcard could change everything. If the Iran situation escalates into a full blockade, all these demand-side bets get ripped up overnight. Lucas: Right. So watch the Strait of Hormuz headlines this weekend. But also watch the factory orders data due next week. If that shows another contraction, the demand narrative will only get stronger. Luna: Good point. For now, it's a waiting game. Thanks for joining us on this episode of Energy Economics. Lucas: We'll be back next week with more breakdowns. Take care.