Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why US Refiners Are Thriving While Drillers Struggle
Transcript
- Lucas: So WTI crude is hovering around 70 bucks a barrel, gasoline at three seventy-eight a gallon — down a bit from last week — and yet energy stocks are telling two completely different stories. Luna: Yeah, I noticed that. The XLE, the big integrated oil ETF, is up almost four percent over five days. But the XOP, which tracks pure-play exploration and production companies, is only up three percent. That gap is interesting. Lucas: Right, and the real story is that refiners are carrying the sector. Marathon Petroleum, Valero, Phillips 66 — those names are outperforming the drillers. Meanwhile companies like Continental Resources or Diamondback Energy are barely moving. The market is pricing a structural divergence between who gets the margin in this environment. Luna: So what changed? We've been talking about oil production growth hitting a wall for a while now. Is that finally showing up in the stock performance? Lucas: I think that's exactly it. US oil production growth has slowed dramatically since late last year. The Permian is still growing, but at a much lower rate — something like two hundred thousand barrels per day this year versus over half a million in previous years. Luna: And costs are up too. I've seen reports that drilling and completion costs in the Permian are up about fifteen percent year over year. Labor, sand, steel — all more expensive. Lucas: Exactly. So drillers are facing a profit squeeze: higher costs, and crude that's stuck around seventy. Meanwhile, refiners are running at near full capacity — the EIA data shows utilization rates above ninety-five percent — and they're capturing the spread between crude oil and refined products. Luna: That spread is the crack spread, right? The margin from turning crude into gasoline and diesel. Lucas: Right. And the crack spread has widened significantly this year. Partly because refineries in the US and globally have closed — we lost about a million barrels per day of capacity during the pandemic that never came back. So supply of refined products is tight. Luna: And demand is still there. Summer driving season, plus export demand for diesel to Europe and Latin America. So refiners are basically printing money. Lucas: That's the narrative, yeah. Valero's stock is up nearly twenty percent year to date. Marathon Petroleum is up around fifteen. Compare that to an E&P like Devon Energy, which is basically flat. Luna: So is this a signal that investors should avoid drillers and pile into refiners? Or is the market pricing in something temporary? Lucas: I think the market is pricing in that the refiner margin cycle is still in its sweet spot. But there's a catch: the longer refineries run at high rates, the more product builds up. We're already seeing gasoline inventories start to creep higher. Luna: So if inventories get too high, margins compress, and refiners could fall back. But drillers have their own problems — they can't grow production cheaply anymore. Lucas: Right. And that's the key structural issue. The US shale model was built on the assumption that you could always drill more, cheaper. That's no longer true. The best acreage is drilled out, costs are up, and investors are demanding returns instead of growth. Luna: Investor discipline is a huge factor. The days of 'drill baby drill' are over. Companies are returning cash to shareholders through buybacks and dividends instead of plowing it all into new wells. Lucas: So you have this bifurcation: refiners benefiting from tight product markets and high utilization, drillers stuck with flat production and rising costs. The XLE versus XOP performance gap reflects that. Luna: Yeah. And I think it's worth noting that the broader macro environment matters too. The CPI data we got shows inflation still sticky — core CPI at 336.1 in May, up from 335.4. That keeps the Fed cautious, which keeps interest rates high, which makes capital-intensive drilling even less attractive. Lucas: Good point. High rates raise the cost of capital for drillers, but refiners are more cash-flow generative, so they can weather it better. Plus, if inflation stays sticky, that supports the price of refined products — gasoline and diesel — which helps refiners maintain margins. Luna: So what's the takeaway for someone listening who is thinking about energy exposure? Is it a sector to overweight right now? Lucas: I think you have to be selective. The broad energy sector is up, but if you look under the hood, you see the divergence. If you want income, refiners might offer good dividends and buybacks. But if you're betting on a rebound in oil prices, you need drillers, and that's a bet on OPEC+ discipline or a geopolitical event. Luna: And that's always a risky bet. Look at the headlines this week — Trump threatening to 'decimate' Iran. That kind of rhetoric can spike oil temporarily, but it's not sustainable. Lucas: Exactly. So the refiner story is more grounded in fundamentals: supply constraints, demand resilience, and a structural advantage that could last another year or two. But it's not without risks. Luna: And it's also worth remembering that the clean energy side continues to struggle. The ICLN clean energy ETF is down over four percent this week. So the rotation is very much toward traditional energy — but specifically the refining part. Lucas: Yeah, it's a fascinating time in energy markets. You've got oil stuck around seventy, natural gas down ten percent this week — Henry Hub at about two ninety-four — and yet refiners are thriving. It really shows that 'energy' is not a monolith. Luna: If walking through the economy with us has made something click — maybe helped you understand why your gas bill is doing what it's doing, or why your portfolio is moving — a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, that's right. It's a small thing that makes a real difference. So, back to the refiners — one more thing I want to mention is the export dynamic. US refiners are exporting record amounts of diesel and gasoline. That's helping to keep domestic margins strong even if local demand softens a bit. Luna: So it's not just US demand — it's global demand. Europe is still scrambling for diesel after Russian supply was cut off. Latin America too. Lucas: Exactly. And that export market is likely to persist because many of those refineries that closed globally aren't coming back. So the US Gulf Coast refiners have an enduring advantage. Luna: So if I'm looking at this from an investment perspective, I should be looking at cash flow, dividend growth, and export exposure rather than just oil price direction. Lucas: I think that's right. And watch the crack spread. If the crack spread starts to narrow — if gasoline inventories build too much — that's the signal to reassess. But for now, the refiner story is intact. Luna: And for drillers, maybe the play is to wait until costs stabilize or oil prices move higher. But that's a waiting game. Lucas: Exactly. So the key takeaway: energy is not one trade. It's a sector with diverging sub-sectors. And right now, the refiners have the upper hand. Luna: Great breakdown, Lucas. I think listeners will appreciate the nuance. Lucas: Thanks, Luna. And as always, we'll keep watching these numbers and how they evolve.