Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Natural Gas Prices Are Falling Despite Rising Power Demand
Transcript
- Lucas: Natural gas is down more than five percent over the past five trading days. Henry Hub spot this morning is at three sixteen per MMBtu. And that's happening while power demand forecasts are getting revised up — largely because of the AI data center buildout. Luna: So the market is basically shrugging off all that narrative about AI juicing electricity consumption. Why? Lucas: Short answer: storage. We entered injection season with inventories well above the five-year average. The Energy Information Administration reported another build last week that was bigger than expected. The market is looking at a lot of gas sitting in the ground and saying, 'I don't see the tightness yet.' Luna: And it's not just storage. The weather hasn't cooperated either, right? We've had a pretty mild June across most of the Lower 48. Lucas: Exactly. Cooling demand is below normal so far. That's the near-term driver. But the interesting thing is how the market is pricing the medium term. If you look at the forward curve — calendar 2027 and 2028 — they're still elevated relative to spot. The market is expecting higher prices eventually, just not this summer. Luna: So the divergence between gas and renewables we've been talking about in recent episodes — it's still there, but clean energy stocks are actually mixed today. First Solar dropped over six percent in the last five days, but Enphase and NextEra Energy are up. Lucas: Right. The clean energy ETF ICLN fell about four percent over the same period. So the whole sector isn't moving in lockstep. First Solar is more exposed to large-scale solar farms, which compete directly with gas-fired power in wholesale markets. If gas is cheap, the economics of a new solar farm get a little harder to pencil out in the near term. Luna: But NextEra Energy — which is a utility holding company with a huge renewables arm — is actually up. What's the signal there? Lucas: NextEra is a regulated utility in Florida, so its earnings are less sensitive to wholesale power prices. And its renewable development pipeline is gigantic — they're building for the AI data center demand that everyone expects in 2027, 2028. The market is rewarding companies that have contracted that future load, even if current gas prices are soft. Luna: So the market is drawing a distinction between 'gas is cheap now' and 'gas will be needed later.' And the renewables stocks that are tied to long-term power purchase agreements are seen as more insulated. Lucas: Exactly. And that's where the natural gas story gets more interesting. Because a lot of the incremental power demand from data centers is going to be met by gas in the near term — there aren't enough renewables and battery storage online yet. But by the time those plants are built, gas prices could be higher. Luna: But if gas is cheap now, why aren't utilities locking in long-term contracts at these prices? Lucas: Some are. But utilities are cautious. They don't want to commit to a 15-year gas supply deal when they're also under pressure from regulators and shareholders to decarbonize. So they're signing shorter deals, maybe three to five years, with options to extend. That keeps the spot market active but doesn't take a lot of storage off the market. Luna: And that's part of why the futures curve is backwardated near term — spot is lower than deferred. The market is saying 'we have enough gas now, but we might not in a few years.' Lucas: Right. The prompt month contract is below the next few months. That's a classic signal that inventories are comfortable. But the deferred contracts — say, the winter 2027 strip — are trading above four dollars. That's a pretty big premium. The market is pricing in that the AI demand wave will eventually collide with supply constraints. Luna: And what about LNG exports? We've had a few new liquefaction facilities come online. Doesn't that tighten the domestic market? Lucas: It does over time. The new capacity on the Gulf Coast is coming online slowly — there have been construction delays. But the export volumes are ramping. The EIA's latest data shows LNG feed gas flows averaging around 13 billion cubic feet per day, which is up year-over-year. That's a demand source that grows regardless of the weather. Luna: So if we have a hot July and August — say, above-normal cooling degree days — that could flip the narrative pretty quickly? Lucas: Absolutely. A couple of heat waves and you could see storage injections fall behind the five-year average. Then the market reprices. That's actually what happened last summer. We started with a storage surplus, then a heat wave in July wiped it out, and prices spiked to four dollars briefly. Luna: But this year we also have the AI data center demand starting to show up in actual consumption numbers. Some of the big tech companies have reported their electricity usage rising double digits year-over-year. Lucas: Yeah, and that's the wildcard. The market is still treating that as a 2027-2028 event. But if Google or Microsoft or Amazon start commissioning new data centers earlier than expected, that demand shows up in real-time. And the gas market is not built for sudden demand spikes — it's a just-in-time system with limited storage flexibility. Luna: So the big question for listeners heading into the second half of 2026: is the current price weakness a buying opportunity for natural gas, or is it a sign that the structural demand story is overhyped? Lucas: I think it's a bit of both. The market has overestimated how quickly the AI demand will materialize. But the long-term fundamentals — retiring coal plants, LNG exports, and yes, electrification of data centers — point to higher demand. The issue is timing. And the market hates uncertainty about timing. Luna: It's really interesting how the clean energy stocks are sort of caught in the middle. They benefit from the demand narrative but are dinged by cheap gas in the short term. Lucas: That's the tension we keep coming back to on this show. And honestly, if walking through the economy with us has made something click about why gas and renewables move the way they do — well, we're listener-supported, no ads. If this episode was worth a coffee to you, that's buy me a coffee dot com slash fexingo. It genuinely helps us keep doing this. Luna: Yeah, it's a small thing that adds up. And we appreciate everyone who's chipped in. Lucas: Back to the gas market. One other thing to watch: the correlation between natural gas and oil has broken down recently. WTI crude is down about two and a half percent over the last five days, around seventy dollars. That's partly driven by macro concerns — we talked about the yen hitting a 40-year low, and China factory data showing weak domestic demand despite strong tech exports. Luna: So oil is getting hit by global demand fears, while gas is getting hit by domestic supply dynamics. They're not telling the same story anymore. Lucas: Exactly. And that's actually a healthy sign for the market — it means each commodity is being priced on its own fundamentals rather than just macro sentiment. Natural gas is a regional market, North America mostly. Oil is global. The divergence makes sense. Luna: But if we see a recession scare, both could fall together. That's the risk. Lucas: Sure. But right now, the data doesn't point to recession. The S&P 500 is near records, the Dow is at an all-time high. The economy is still growing, albeit slowly. What we're seeing is a gas market that's saying 'prove it' to the AI demand story, while the utility sector is already building for it. Something has to give. Luna: And that probably happens in the next 12 to 18 months, as those data centers come online. Lucas: That's the timeframe. For now, keep an eye on the weekly storage reports, and watch the weather forecasts for the Midwest and Northeast. If we get a sustained heat wave, this conversation changes fast. Thanks for listening.