Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Falling Faster Than Gasoline This Time
Transcript
- Lucas: So crude oil has absolutely collapsed this week. WTI settled around $80.90 this morning, down more than 10 percent in just five trading sessions. Brent is off roughly the same — $83.75. But if you filled up your car yesterday, you probably paid $4.15 a gallon, down only about 15 cents from the peak. Luna: Right, and that's the part that drives people crazy. Oil drops ten bucks and gas drops a dime. Why is the pass-through so lopsided? Lucas: Well, there's the classic explanation — refiners hedge their crude purchases weeks in advance, so the cheaper oil hasn't worked its way through the system yet. But this time there's actually something deeper going on, tied to the Iran deal and the Strait of Hormuz. Luna: Let's talk about that. The big headline this morning is that the U.S. and Iran are set to sign a peace deal Friday, ending what's been a really disruptive conflict for oil markets. And part of that deal involves reopening the Strait of Hormuz. Lucas: Exactly. And that's the key to understanding why crude is crashing while gasoline is sticky. The Iran deal is a supply-side shock for crude — the prospect of Iranian barrels returning to the market, plus the end of the Hormuz blockade, means more global supply. But the U.S. gasoline market is much more regional. We export a lot of our crude, but the refining system for gasoline is domestic and it's been running flat out. Luna: So the crude price drop is a global story, but the gas price is a local story. That makes sense. But if crude keeps falling, will gasoline eventually catch up? Lucas: It should, but the timing is uncertain. The other factor is that we're in June — summer driving season, when refineries switch to the more expensive summer-blend gasoline. That blend costs more to produce and there's limited storage capacity for it. So even if crude falls another five dollars, the refining margin — the crack spread — is going to remain elevated until the fall. Luna: And that's interesting because the crack spread for gasoline has actually widened this week. I saw that the 3-2-1 crack spread — which is a measure of refining profitability — jumped even as crude collapsed. So refiners are basically pocketing the savings instead of passing them through. Lucas: Exactly. And it gets more complicated when you look at the energy stocks. The XLE, the energy sector ETF, is down only 1.3 percent over the past five days. ExxonMobil is off 3.1 percent, Chevron down just 1.1 percent. Compared to a 10 percent drop in the underlying commodity, that's a very mild reaction. Luna: What does that tell you? That investors think crude will bounce back, or that the Iran deal won't actually add that much supply? Lucas: I think it's a bit of both. The Iran deal is still not signed until Friday, and there's a history of these deals falling apart. But more importantly, many of these companies have hedged their production for the second half of 2026 at much higher prices. So the impact on their cash flows is muted even if spot crude stays low for a while. Luna: Right, we talked about that in episode 40 — the hedging frenzy. So the stocks are already pricing in a lower oil price environment. That makes sense. Lucas: But the gasoline stickiness is also a political problem. The national average is $4.15, which is still painfully high for a lot of households. And if crude is at 80 but gas stays above 4 dollars, you get this perception that the oil companies are gouging. That's partly why we're seeing the Biden administration talk about releasing more from the Strategic Petroleum Reserve. Luna: Which would probably have a bigger impact on crude prices than on gasoline, because the SPR is mostly sour crude that not all refineries can process. So you could end up with even more downward pressure on crude without actually helping drivers at the pump. Lucas: Exactly. And that's the conundrum. The policy levers we have are all upstream, but the pain point is downstream. The only real solution is either a sustained drop in crude — which the Iran deal might deliver — or an increase in domestic refining capacity, which takes years. Luna: So what's your take on the next few weeks? Assuming the deal gets signed Friday, do you see crude testing lower levels? Lucas: I think we could see WTI dip into the mid-70s if Iranian barrels start flowing within 60 to 90 days, which is what some analysts are estimating. The IEA has said Iran could add about 1.5 million barrels a day within six months. That's a big number. Luna: But remember, OPEC+ has also been holding back supply. If Iranian barrels come back, they might increase their own quotas to keep prices from crashing too far. So there's a geopolitical chess game here. Lucas: Definitely. And that's one reason the energy stocks aren't panicking. The big producers know that OPEC+ will adjust. But for the consumer, the near-term outlook is still tough. Gasoline at $4.15 feels a lot better than $4.30, but it's still about a dollar higher than it was three years ago. Luna: And when you factor in that core CPI is still running at 3.1 percent year over year, a lot of households are feeling squeezed. The breakeven inflation rate on the 10-year is at 2.31 percent, which suggests the market expects inflation to stay above the Fed's target for a while. Lucas: Which brings us back to energy. It's the biggest wildcard in the inflation story. If oil stays at 80 and gasoline comes down to, say, $3.85 by Labor Day, that's a big relief. If it doesn't, the Fed is going to have a hard time cutting rates. Luna: Speaking of the bigger picture, I want to ask you something. We talk a lot about these market mechanics, and I think our listeners appreciate the deep dives. But it takes a lot of work to pull together this kind of analysis every day. Lucas: It does. And honestly, the reason we can keep doing it without running ads or pushing sponsored content is that a small group of listeners supports the show directly through buy me a coffee dot com slash fexingo. It's not a huge number, but it covers the research time and the production costs. Luna: Yeah, and it's a model that keeps us independent. We don't have to tailor our takes to please an advertiser. We just get to follow the data and explain what we see. Lucas: Exactly. So if you've been getting value from these episodes, that's the simplest way to keep them coming. No pressure at all, but we appreciate every single person who chips in. Luna: Alright, back to the markets. So you mentioned OPEC+ could adjust. Let's talk about what they might actually do at their next meeting in early July. Lucas: Right. The next OPEC+ meeting is scheduled for July 1. And I think they're watching this Iran development very closely. If the deal holds and Iranian oil starts coming back, they'll likely delay the planned unwinding of their production cuts. Some members like Saudi Arabia are already signaling they want to keep prices above $80, so they'll do what it takes. Luna: But that assumes they can coordinate. The last time Iran was about to re-enter the market, in 2015, OPEC actually increased production to defend market share, and that led to the 2014–15 crash. So history isn't always on the side of discipline. Lucas: That's a fair point. But the dynamics are different now. The Saudis need higher oil prices to fund Vision 2030 and their giga-projects. They've got a fiscal breakeven of around $85 a barrel. So they're highly motivated to prevent a price collapse. Luna: And then there's the wildcard of U.S. production. The latest EIA data shows domestic output holding around 13.2 million barrels a day, but the rig count has been declining. So we might not see much growth from here even if prices stay above $80. Lucas: Right. The shale producers are more disciplined now. They're returning cash to shareholders instead of drilling everything. So the supply response is slower than it used to be. That's another reason the stocks held up better than the commodity this week. Luna: So to summarize: crude crashes on Iran deal hopes, gasoline only edges down due to refining and seasonal factors, energy stocks barely budge because hedging and discipline. That's the picture as of June 15, 2026. Lucas: That's the picture. And the big question is whether the consumer relief comes in time for the summer driving season. If we get gas below $4 by July 4th, that's a meaningful political and economic win. If not, the frustration is going to keep building. Luna: And we'll keep watching the data. Thanks for joining us on Energy Economics. We'll be back tomorrow with a closer look at what the Iran deal means for global shipping and insurance rates. Lucas: Looking forward to it. Until then.