Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Crude Is Falling Despite Iran Strait Tensions
Transcript
- Lucas: So we've got this really weird picture in oil right now. On Sunday night, Iran talks are on hold after fighting broke out and Trump once again threatens annihilation — that's a direct CNBC headline from today. And yet, West Texas Intermediate crude closed Friday at $69.23 a barrel, down more than five percent on the week. Brent fell even harder, almost six percent, to $72.60. Luna: That's a massive disconnect. Usually, any whiff of a Strait of Hormuz disruption sends oil spiking. Prices should be ripping higher on that headline, not falling. Lucas: Exactly. And I think that tells us something important about what the market is actually focused on right now. It's not supply risk — it's demand destruction. The market is looking past the geopolitical noise and seeing a global economy that's slowing down. Luna: So the demand story is simply overwhelming the supply fear. How bad is the demand picture? Lucas: Well, look at the economic data we've gotten over the past few weeks. The CPI for May came in at 334.0, up from 332.41 in April. Core CPI also ticked up. But the ten-year breakeven inflation rate actually fell to 2.20 percent from 2.21. That's a tiny move, but it suggests inflation expectations are moderating, which ties into slower growth expectations. Luna: And then there's the PCE data. The core PCE price index hit 130.1 in May, up from 129.67. So inflation is still sticky, but the market seems to be pricing in that the Fed is done hiking and that the economy is going to cool. Lucas: Right. And for oil, that's a bigger deal than any single headline about Iran. Because if global GDP growth falters, especially in China and Europe, the demand for crude is going to take a hit. And remember, OPEC+ still has a lot of spare capacity they can bring back. Luna: How much spare capacity are we talking about? Lucas: The latest estimates put it somewhere around five to six million barrels per day, most of it sitting in Saudi Arabia and the UAE. That's a huge cushion. Even if a few million barrels per day of Iranian or Hormuz-related supply got disrupted, OPEC could probably fill the gap relatively quickly. Luna: So the market is basically saying: I don't fear a supply shock because there's a safety valve. Meanwhile, demand is the real worry. Lucas: Precisely. And you can see that play out in the energy equities too. The XLE energy sector ETF fell about half a percent on the week. ExxonMobil dropped one point four percent, Chevron fell two point three, ConocoPhillips was down three point four. Those are not catastrophic moves, but they're consistent with a market that sees lower oil prices ahead. Luna: So if the supply shock narrative is dead, what would have to change to make oil rally again? Lucas: A couple of things. One, actual physical disruption — if fighting in the Strait of Hormuz actually led to tankers being stopped or damaged, that would be a real supply event. Two, a significant rebound in global economic activity, which seems unlikely in the near term. Or three, a deep cut from OPEC+ that surprises to the downside. Luna: But OPEC+ is already cutting pretty aggressively. They've been holding back production for over a year now. Lucas: They are. But the market is starting to doubt whether those cuts are enough, especially if demand keeps softening. And if some members start cheating — which they often do — the cuts become even less effective. Iraq and Kazakhstan have a history of overproducing. Luna: It feels like a real test of OPEC+'s credibility. If they can't hold the line on cuts, prices could go even lower. Lucas: And that's the risk. Some analysts are already talking about oil dipping into the mid-sixties on WTI if the macro picture deteriorates further. But let's not forget the other side — the market is also pricing in a lot of bad news. If we get any positive surprise on demand, say from a Chinese stimulus package, oil could bounce hard. Luna: That's one of those moments where we really appreciate listeners who find this kind of breakdown useful. If today was actually helpful to you, the way these episodes stay ad-free is through listener support. It's a small thing, but you can buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just if you want to keep this going. Lucas: Absolutely. It's a simple way to help us keep doing what we do without any ads or sponsors. And we really appreciate everyone who does that. Now, back to oil — one other data point I want to highlight is natural gas. It actually rallied four point two percent on the week, closing at $3.28. That's a complete divergence from crude. Luna: Why is natural gas bucking the trend? Lucas: A couple of reasons. First, we're heading into summer, which means higher cooling demand. Second, US natural gas production has been flat to slightly declining because drillers have been disciplined. And third, LNG export demand remains strong. So nat gas has its own micro-narrative that's separate from the crude oil macro story. Luna: So it's really a tale of two energy markets right now. Oil is all about global macro and geopolitics, while nat gas is more about domestic supply and weather. Lucas: Exactly. And that's a good reminder that commodities are not a monolith. Each one has its own supply-demand balance. Even within crude, Brent and WTI are behaving slightly differently — Brent fell more because it's more exposed to global trade flows and the Iran news. Luna: So where does that leave us for the next few weeks? Are you bearish on oil? Lucas: I lean bearish in the short term, but with a caveat: the geopolitical risk is real, and it's binary. If something actually happens in the Strait, all bets are off. But as of now, the trend is down, and the macro data isn't supportive. I'd watch the weekly EIA inventory reports closely — if we start seeing big builds, that's another negative signal. Luna: And for listeners who want to trade or invest around this, what's the play? Lucas: If you're bearish, you could look at shorting crude futures or buying put options on the XLE. But that's not for everyone. A safer approach might be to avoid energy stocks altogether until the picture clears, or to focus on companies with strong balance sheets and low production costs that can weather lower prices. Exxon and Chevron are still pretty solid. ConocoPhillips might be more vulnerable because its stock fell more. Luna: And if you're bullish longer term? Lucas: Then you'd want to buy on weakness, but wait for a catalyst — maybe a Saudi production cut extension or a demand surprise. Buying now is catching a falling knife. Better to wait for some stabilization. Luna: Fair enough. So oil is the story of the week, but we should also note that gold held above $4,000, barely down on the week, while silver fell almost four percent. That's interesting too. Lucas: Gold's resilience at these levels is remarkable. It's been trading around $4,100 and only slipped to $4,096 on Friday. That tells me the market still sees inflation and uncertainty, but it's not panicking. Silver, on the other hand, is more industrial — it's getting hit by the same demand concerns as oil. Luna: So silver is basically a proxy for global growth expectations right now. Lucas: Exactly. And copper, interestingly, edged up one point one percent to $6.21. That's a tiny gain, but it's positive in a week where most commodities fell. Copper might be getting a small boost from the energy transition narrative, but it's still very macro-sensitive. Luna: Alright, so the big takeaway: oil is falling because demand fears outweigh supply fears, and that's the dominant theme in commodities right now. Lucas: I think that's right. And it's a theme we'll be watching closely in the weeks ahead, especially if we get more data on China's economy or any escalation in the Middle East. For now, the market is voting with its feet — and it's voting for lower crude. Luna: Well, thanks for walking through that with us. We'll be back soon with more.