Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Natural Gas Is Rising While Oil Drops
Transcript
- Lucas: Oil is getting hammered. WTI crude dropped almost 5 percent in the last five trading days, Brent down more than 3 percent. But natural gas? Up nearly 5 percent in the same stretch. Luna: That is a pretty sharp split. Usually these two move together, at least directionally. Lucas: Exactly. And the fact that they are diverging tells you something about what is driving each market right now. Oil is getting hit by macro fears — weaker Chinese demand, the lingering effects of the Iran deal bringing more supply — while gas is responding to its own micro factors. Luna: If walking through the economy with us has made something click, the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. Lucas: Yeah, it is a small gesture that makes a big difference. Now, back to that divergence — let us talk about what is actually moving natural gas right now. Luna: So what is pushing Henry Hub higher? I mean, we are still in June, summer cooling demand is just ramping up. Lucas: Right. And that is part of it, but the bigger factor is LNG exports. The U.S. is exporting record volumes of liquefied natural gas to Europe and Asia. Global prices are still elevated compared to domestic Henry Hub, so every molecule that can be shipped overseas is being shipped. Luna: So you have a supply that is being diverted away from domestic storage, even as we head into the peak demand season. Lucas: Exactly. Storage injections have been running below the five-year average for several weeks now. The latest EIA data showed an injection of 78 billion cubic feet, which was below expectations. That is starting to spook the market. Luna: And oil's story is almost the opposite. Supply concerns have eased, demand outlook is softening. Lucas: Right. The Iran situation, while still tense, has not led to an actual closure of the Strait of Hormuz. And Chinese economic data has been disappointing — their industrial production and crude imports are both down. So oil is struggling to find a bid. Luna: But natural gas is also getting some support from the broader energy transition narrative, is it not? I mean, gas is seen as a bridge fuel, but also as a complement to renewables. Lucas: That is a good point. When wind and solar underperform — which happens, especially during heat waves with low wind — gas-fired power plants ramp up. And we are seeing more of those episodes. Plus, coal retirements continue, so gas becomes the default backup. Luna: It is interesting because a year ago, everyone was focused on the oil-gas correlation. Now they seem to be living separate lives. Lucas: And that has implications for investors. The XLE energy sector ETF is down 2 percent in the last five days, dragged lower by the big oil stocks. Exxon Mobil down 1.7 percent, Chevron down 3 percent. But natural gas-weighted names like EQT or Coterra might be holding up better. Luna: So if you are looking at the energy space, it is not a monolith anymore. You have to pick your subsector. Lucas: Exactly. And the clean energy side tells another story. The iShares Global Clean Energy ETF, ICLN, is up nearly 3 percent over the same period. So while oil is weak, capital is rotating into renewables and gas. Luna: But not solar. TAN, the solar ETF, is down 2.5 percent. First Solar fell almost 4 percent. Lucas: That is partly a tariff story. There is uncertainty around solar panel imports and new trade restrictions. So clean energy is not a monolith either. Luna: Which brings us back to natural gas. It seems to be in a sweet spot right now: domestic demand is solid, exports are booming, and it is benefiting from the intermittency of renewables. Lucas: And the price action reflects that. Henry Hub at 3.30 is still low by historical standards — we were above 6 dollars in 2022 — but the trajectory matters more than the level. Luna: What about the inflation angle? If natural gas stays elevated through the summer, does that feed into CPI? Lucas: It could. The CPI report for May showed overall prices up, with energy a component. Gasoline is down from its peak, but natural gas and electricity costs are less visible. If gas prices remain firm, that could keep headline inflation sticky. Luna: And that might complicate the Fed's path. The ten-year breakeven inflation rate is at 2.23 percent, which is above the Fed's target. So any energy-driven CPI bump gets noticed. Lucas: Exactly. But for now, the market is treating oil and gas as two different stories. Oil is about global macro headwinds. Gas is about supply constraints and structural demand. Luna: So to sum up: oil down 5 percent, gas up 5 percent. The energy sector is not one trade. Lucas: And that is worth remembering whether you are filling up your tank or looking at your portfolio. The old rules of energy correlations are breaking down. Luna: Next week, we will check back on storage data — if injections continue to miss, gas could have more room to run. Lucas: And if oil breaks below 70, that becomes a whole different conversation. For now, the split is the story.