Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Rising Amid Middle East Strikes
Transcript
- Lucas: So the U.S. conducts self-defense strikes in Iran, Brent crude pops two percent, and the big question isn't just 'will this escalate' — it's 'why was oil not already pricing this in?' Luna: Right, because we've been talking for weeks about how the risk premium was actually shrinking. Geopolitical drama, oil barely budging. Now it's back. Lucas: Exactly. And I think the reason goes to something we've touched on before: the market had basically decided that Iran wasn't going to disrupt the Strait of Hormuz — that the diplomatic track, however shaky, was credible enough to keep barrels flowing. General Petraeus said yesterday Iran is 'in the process of blinking' over the strait. That narrative just took a hit. Luna: But the strikes are framed as self-defense, not the start of a campaign. So is this a one-day repricing or something more structural? Lucas: That's the million-dollar question. Brent's at ninety-five forty-seven this morning, up from around eighty-seven a month ago. But here's the weird part: WTI's at ninety-two oh-three, so the brent wti spread is over three dollars — that's wide. It tells me the risk is loading onto the global benchmark, not the domestic one. The market is saying 'this is a Hormuz story, not a Permian story.' Luna: So refiners on the Gulf Coast who use Brent-linked crude are feeling it more than, say, a Midland producer. That's the kind of divergence that actually hits earnings differently across the sector. Lucas: Right. And you see it in the stocks too. Exxon down three and a half percent this week, Chevron down one and a half. But the exploration and production ETF, XOP, down two point four. The market is sorting winners and losers based on exposure. Meanwhile, natural gas is up — Henry Hub at three-oh-six, up almost two percent on the week. That's partly weather, partly a view that if oil gets disrupted, gas gets pulled along as a substitute in some industrial uses. Luna: And on the other side of the trade — solar. Enphase Energy up twenty-nine percent in five days. First Solar up ten percent. The clean energy ETF, ICLN, up five percent. So you've got oil up on a geopolitical shock and solar up even more. That's not a normal correlation. Lucas: No, it's not. And I think it tells us two things. One: there's genuine conviction that the energy transition narrative is stronger than the oil spike — that this isn't 2008 where a crude rally just crushes everything. Two: a lot of that solar move is company-specific. Enphase specifically blew past estimates on their last quarter, and the market is rewarding execution. But also, higher oil prices do make solar's levelized cost of electricity look relatively cheaper. It's a nudge. Luna: You know, speaking of things that feel off — the ten-year breakeven inflation rate ticked up again. It's at two point four percent now. That's up from two point three nine last week. Not a huge move, but the direction matters. Lucas: Yeah, that's the market's implied expectation for average inflation over the next decade. Two point four is not alarming, but it's creeping up from the post-pandemic lows. And if oil stays elevated, that feeds into headline CPI, which feeds into breakevens, which feeds into Fed policy. The core PCE print for March — the Fed's preferred gauge — came in at one hundred twenty-nine point three, up from one twenty-eight point nine. That's a three-tenths month-over-month rise annualized. Not catastrophic, but not settling either. Luna: So you've got the Fed watching oil, watching breakevens, and meanwhile the strikes in Iran add a supply-risk layer that's hard to model. How do you even position for that? Lucas: Honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's what keeps this show ad-free and independent, and every little bit helps us keep digging into these questions. Luna: Yeah, it's a small way to say 'this conversation matters to me.' We really appreciate it. Lucas: So back to positioning — look, you can't hedge every geopolitical tail. But what you can do is watch the spread between Brent and WTI, watch the breakevens, and watch the ratio of energy to clean energy ETFs. If brent wti stays above three dollars and the breakevens keep creeping up, the market is pricing in a persistent risk premium. That's a signal to take seriously. Luna: And the diplomatic track? Trump pushing for a peace deal, strikes happening anyway — it's a confusing signal. What's your base case? Lucas: My base case is that this de-escalates within a few weeks. Neither side wants a full-blown conflict in the strait. But the market has been burned by that assumption before. The fact that Brent didn't fully price in the possibility of strikes means there's still room for another leg up if something goes wrong. I'd say the risk is asymmetric to the upside for oil in the short term. Luna: And for clean energy? Does that asymmetric oil risk actually pull capital into solar and wind? Lucas: It can, but not mechanically. Look, Enphase is up twenty-nine percent this week. That's not just an oil trade — that's a company-specific beat. But the macro tailwind is real. Every time oil spikes, the payback period on a solar installation shrinks a little. And with the Inflation Reduction Act subsidies still in place, the math gets even better. So I think the clean energy rally has legs, but it'll be choppy. It's not a straight line. Luna: So what's the one number you're watching this week? Lucas: The brent wti spread. If it stays above three dollars, the market is saying the geopolitical risk is real and localized. If it narrows back to under two, that's a sign the market thinks the strikes are a one-off and the diplomatic track is back on. That's the tell. Luna: And for listeners who want to track that themselves — what's the easiest way? Lucas: Just pull up Brent crude and WTI crude on any free finance site. Subtract one from the other. If the gap is widening, ask yourself: 'Am I positioned for more oil volatility or less?' That's the whole game right now. Luna: Alright, we'll be watching it with you. Thanks, Lucas.