Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Oil Is Crashing Despite Tight Supply in 2026
Transcript
- Lucas: So oil is having its worst week in months, and the headline reason is pretty clear — Iran and the U.S. reportedly close to a deal that would reopen the Strait of Hormuz and lift some sanctions. Luna: Yeah, the numbers are ugly. WTI is down more than seven percent in the last five days, Brent not far behind. Lucas: Right. And that move has been sharp — WTI settling around $84 today, Brent just above $87. But here's what I find interesting: this isn't a supply glut story. Inventories are actually fairly tight. Luna: So the selloff is purely about the risk premium coming out? Lucas: I think that's exactly what's happening. For months, the market had baked in a significant geopolitical risk premium because of tensions in the Middle East, the threat to shipping through Hormuz. Now you've got a potential diplomatic resolution, and that premium is evaporating fast. Luna: But is the deal actually done? The headlines are coming from Iranian state media — not exactly a neutral source. Lucas: That's the big question. The market is clearly pricing in a higher probability that something gets done. But we've seen this before — false starts. The difference this time might be that both sides have incentives. Iran needs economic relief, and the Biden administration — well, now the Warsh administration — wants to avoid a broader conflict and get oil prices down ahead of the next election cycle. Luna: It's interesting because earlier this year, analysts were saying Brent would stay above $90 all year. Now the narrative flips. Lucas: Absolutely. And I think this reveals something about how markets work. The physical supply-demand balance hasn't changed much in the last week. OPEC+ is still holding back barrels. U.S. production is flat. But the price has moved dramatically because the perceived risk of disruption has fallen. Luna: So for listeners who trade or invest in energy — is this a buying opportunity, or is there more downside? Lucas: That's the million-dollar question. If the deal goes through, you could see another few dollars drop as Iranian barrels gradually come back to market. But if talks stall, or if there's a breakdown, the risk premium snaps back quickly. It's a binary outcome trade, and those are always dangerous. Luna: Dangerous but tempting. I mean, some value investors are probably licking their chops at these levels in oil stocks. XOM and CVX are down two percent each on the week. Lucas: Right. And that's where I think you have to separate the commodity price from the equity story. Even if oil settles lower for a while, companies like Exxon and Chevron are generating enormous free cash flow at these prices. They're not going to stop paying dividends or buying back stock because oil dips from $90 to $84. Luna: But the market is selling them anyway. It's a sympathy move, or maybe a de-risking trade. Lucas: Exactly. And that's often how it works — the headline hits, traders sell first and ask questions later. The next few weeks will be about parsing the actual details of any agreement. Luna: Let's talk about what this means for inflation, because that's the bigger macro picture here. Lucas: Good point. We got the CPI print for May earlier this month — headline CPI at 334.0, still creeping up. Core CPI at 336.1. Energy is a big component of that. If oil stays lower, it feeds through to gasoline prices, which directly affects consumer sentiment and headline inflation. Luna: The 10-year breakeven inflation rate actually dropped a bit — down to 2.29 percent from 2.34. That could partly reflect lower oil prices. Lucas: I think it does. Lower energy costs take pressure off the inflation expectations measure. But core inflation is still sticky — services, housing, those aren't going to drop just because oil falls. So the Fed still has a dilemma. Luna: Right. And on that note — you mentioned Warsh earlier. If he becomes Fed chair, he's been pretty hawkish in his public comments. So a lower oil price might give him room to ease up, but probably not a lot. Lucas: That's the nuance. Oil is a tailwind, but it's not the whole story. And it's worth remembering that lower oil can also be a signal of weaker global demand, which is not great for risk assets. Luna: So the Iran deal could be a double-edged sword — good for inflation, bad for growth expectations. Lucas: Exactly right. And that's the kind of cross-current that makes commodities so fascinating to watch. One piece of news, and you have to re-evaluate half a dozen connections. Luna: If walking through the economy with us has made something click, and you want to support keeping this show ad-free, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, we really appreciate that. Every little bit helps us keep doing the research and bringing you these conversations without sponsor interruptions. Luna: Absolutely. And now back to oil — what are you watching for the rest of the week? Lucas: I think the key data point is the weekly EIA inventory report. If we see a big build in crude stocks, that would confirm the market is loosening, and that could accelerate the selloff. But if inventories are flat or draw, it suggests the physical market is still tight, and the price drop is purely a risk premium unwind. Luna: Right, so the next few days will be really telling. Lucas: Absolutely. And I'd also keep an eye on the dollar. If the dollar weakens on the Iran deal — because it reduces geopolitical risk — that could provide some support for commodities priced in dollars, including oil. Luna: So many moving parts. But that's what makes this market so interesting. Lucas: It really is. And for listeners who want to dig deeper, I'd recommend looking at the options market — the volatility skew has shifted massively this week. Put premiums are elevated, which suggests a lot of traders are hedging for further downside, but that can also set up a squeeze if the news turns positive. Luna: Good advice. Let's see what the rest of the week brings. Lucas: We'll be watching. And we'll catch you next time on The Commodities Economy.