Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Down 14 Percent While Clean Energy Stocks Surge
Transcript
- Lucas: So oil is having its worst week in months — WTI crude down 14.4 percent in five days, Brent down nearly 13 percent. And at the same time, the clean energy ETFs are up. ICLN, the iShares Global Clean Energy fund, gained 6.3 percent. First Solar up almost 8 percent. That's not a coincidence. Luna: Yeah, that's a real decoupling. A month ago, clean energy was getting crushed while oil held steady. What changed? Lucas: Two big things. First, the Iran deal. The possibility of sanctions relief bringing a million-plus barrels a day back onto the market is a genuine supply shock. Second, Chinese demand data came in weaker than expected — industrial output and oil imports both dipped. That's a double hit for crude. Luna: Right, and the market seems to be pricing in that lower oil prices might actually help clean energy by easing inflation fears and maybe making central banks less hawkish. Lucas: Exactly. There's also a rotation story here. Money that was hiding in energy stocks — XLE down 5.5 percent this week, Exxon down 6.7 — is rotating into sectors that benefit from lower input costs. Solar manufacturers use a lot of energy to make panels. Cheaper oil and gas means lower production costs. Luna: And First Solar especially — they've got this vertical integration moat, plus they benefit from the Inflation Reduction Act tax credits. So if oil drops, their margins might actually expand. Lucas: Right. But let's be precise about the numbers. WTI is at $75 a barrel now. That's down from $95 just a week ago. That's a 20 percent drop in about seven trading days. That's fast even by oil standards. Luna: Is this 2020 all over again? Because that crash was driven by a demand collapse. This feels different — it's part supply, part demand. Lucas: It is different. In 2020, we had a global lockdown. Now we have a specific supply-side catalyst — the Iran deal — and a demand soft patch in China. But the US economy is still growing, and gasoline demand is actually holding up. Regular gas is $4.05 a gallon, down from $4.15 last week, but that's still high historically. Luna: So the consumer is getting a small break at the pump, but not a huge one. And if oil stays at $75, we might see gas drop below $4 soon. Lucas: Possibly. But refineries are running near capacity, and there's always a lag. The bigger question is whether this oil sell-off is a buying opportunity or the start of a longer-term shift. Luna: What do the futures curves say? Is the market in contango or backwardation? Lucas: Good question. As of today, the front-month contract for WTI is at $75, and the six-month forward is around $73. So it's in mild contango — meaning the market expects prices to stay weak or fall a bit more. That's consistent with a supply glut narrative. Luna: But if the Iran deal falls through, that whole thesis unravels. We've seen this before — headlines drive oil 5 percent one way, then a tweet reverses it. Lucas: True. And that's why the clean energy rally might be fragile too. If oil bounces back, the rotation could reverse. But there's a structural argument here: even if oil stabilizes, the long-term trend is toward electrification and renewables. The IRA guarantees subsidies for years. Luna: So you're saying the clean energy stocks might have more legs this time because the policy backdrop is firmer than in 2020 or 2014? Lucas: Exactly. In 2014, when oil crashed, solar stocks got crushed because cheap oil meant cheap gasoline, and nobody cared about carbon. Now, you've got corporate renewable purchase agreements, state-level mandates, and federal tax credits that are locked in through 2032 at least. Luna: But interest rates are still high. The 10-year breakeven inflation is at 2.32 percent. That's not low. And clean energy stocks are basically long-duration assets — their future cash flows get discounted heavily when rates rise. Lucas: Right, that's the counterargument. First Solar's P/E is around 20, which isn't crazy, but it's not cheap either. And if the Fed stays hawkish, these stocks could get hit again. But this week, the market is saying: lower oil = lower inflation = fewer rate hikes. That's the narrative. Luna: Speaking of narratives, I noticed natural gas is up 4.9 percent this week, even as oil plunges. That's interesting. Usually they move together. Lucas: They do, but natural gas has its own drivers. Henry Hub is at $3.24 per MMBtu. There's been some hot weather in the South, boosting cooling demand. Also, LNG export terminals are running near full capacity, so there's strong demand from Europe and Asia. Oil and gas are decoupling. Luna: So the energy complex is really splitting into two stories: oil driven by geopolitics and Chinese demand, gas driven by weather and LNG exports, and clean energy driven by policy and rotation. That's a lot of moving parts. Lucas: It is. And if you're an investor, you have to pick your thesis carefully. I think the most durable bet might be on the clean energy side, but with the caveat that it's going to be volatile. Luna: Well, if walking through the economy with us has made something click, and you've gotten value from breaking down these moves, we do have a small way listeners can help keep the show ad-free and independent. Lucas: Yeah, it's just a coffee. Honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. No pressure, no perks, just knowing that the show matters to you. Luna: It's a small gesture that goes a long way in keeping us free from sponsors and focused on the data. So thanks for considering it. Lucas: Now back to the decoupling. One thing I want to watch is the earnings reports from the big oil companies in the next few weeks. Exxon and Chevron report in late July. If they start cutting capex guidance because of lower prices, that could signal they expect the weakness to persist. Luna: And if they cut capex, that actually tightens future supply, which could eventually push prices back up. So there's this self-correcting mechanism. Lucas: Right. Oil markets are cyclical. But the clean energy story is more structural. I think the next catalyst for solar stocks will be the second-quarter earnings season — if companies like First Solar and Enphase show strong margins despite high rates, that could confirm the rotation is real. Luna: And on the flip side, if oil stabilizes and rates stay high, the clean energy rally might fizzle. So we're at an inflection point. Lucas: Exactly. That's why this week matters. It's not just a random sell-off in oil — it's a signal about how the market is reassessing the energy transition in a world of high rates and geopolitical shocks. Luna: Alright, great conversation. We'll keep tracking these numbers and check back next week to see if the decoupling holds. Lucas: Sounds good. Until then.