Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why US Refiners Are Running Hot While Oil Drillers Cool Off
Transcript
- Lucas: So WTI crude is trading at $70.55 a barrel as of this afternoon, up nearly 3% over the past five days. But here's the thing — US oil production growth has basically flatlined. The rig count is barely budging. Meanwhile, US refiners are running at over 95% of capacity and their margins are widening. Luna: That's a pretty stark split. The guys pulling oil out of the ground are pulling back, and the guys turning it into gasoline and diesel are printing money. Lucas: Exactly. And it's a divergence that's been building for a while, but July 2026 is really putting it in focus. Let's start with the upstream side. US crude output has been stuck around 13.2 million barrels a day for months. The Permian is still growing, but at a much slower pace. Pipeline constraints in the basin are starting to bite — there's not enough takeaway capacity to justify a big drilling push. Luna: Right, and the public E&P companies are under pressure from investors to return cash, not spend it on rigs. So discipline is real. Lucas: Really real. The majors like Exxon and Chevron — XOM up 2.1% on the week, CVX up 3.8% — they're spending more on buybacks and dividends than on new wells. The independents are even more cautious. So even with WTI above $70, the rig count is hovering around 590, which is basically where it was a year ago. Luna: Now contrast that with the refining side. Crack spreads — the difference between crude oil prices and the products you make from it — have been expanding. What's driving that? Lucas: A few things. First, global refining capacity is still tight after the pandemic-era closures. Second, diesel demand in Europe and Latin America has been strong — US diesel exports hit a record high in May. Third, gasoline inventories in the US have been drawing down ahead of summer driving season. Regular gas at the pump is $3.78 a gallon, down from $3.83 a week ago, but that's partly because crude eased. The margin for refiners is actually better. Luna: So refiners like Valero and Marathon Petroleum are the ones cashing in. Their stocks have been outperforming the exploration and production companies. Lucas: Valero specifically — their Gulf Coast complex is running flat out. The 3-2-1 crack spread, which is a common benchmark, has been hovering around $28 a barrel. That's well above the five-year average of around $22. So you've got this unusual situation where the downstream part of the business is thriving while the upstream is treading water. Luna: And that has implications for the broader economy, right? Because if refiner margins stay high, it could keep gasoline prices from falling too fast even if crude drops. The consumer doesn't necessarily benefit from cheaper oil if the spread is wide. Lucas: That's the key insight. The price at the pump is a function of crude cost plus the crack spread. If crude falls to $65 but the crack spread widens to $30, you might still be paying $3.50 a gallon. So the relationship between oil prices and consumer relief is not one-to-one right now. Luna: Let's talk about the geopolitical angle too. The Strait of Hormuz threat level was raised to 'severe' today after Iran attacked tankers. That's a risk premium for Brent, but US refiners actually benefit because they process mostly domestic crude. They're insulated from that supply shock. Lucas: Great point. US refiners are configured for heavy sour crude from Canada and the Gulf of Mexico, not the light sweet stuff that Iran would export. So the Iran premium in Brent doesn't hurt their input costs much. Meanwhile, if the disruption raises global product prices, they can export more. It's almost a hedge. Luna: So is this divergence sustainable? Can refiners keep running hot while drillers stay cautious? Lucas: It depends on demand. If the economy slows — and CPI ticked up again in May, core PCE is still above 2% — then product demand could soften. That would compress crack spreads. But for now, the market is pricing in a pretty strong summer for driving and flying. Jet fuel demand is back above 2019 levels. Luna: And on the supply side, if drillers stay disciplined, we could see crude inventories tighten further. That would eventually lift prices and maybe coax more rigs back. Lucas: But the industry has changed. The message from Wall Street is clear: don't grow production, grow free cash flow. So even if WTI hits $80, I'm not sure we'd see a drilling boom like in 2018. The capital discipline era is real. Luna: You know, this is exactly the kind of conversation that makes me glad we don't have to interrupt it with ads. We keep the show ad-free because it lets us drill into the nuance without a car commercial breaking the flow. Lucas: Absolutely. And if you find value in that approach — in getting this kind of specific, unsponsored analysis — the best way to support it is through buy me a coffee dot com slash fexingo. It keeps the lights on without any sponsor pressure. Luna: Yeah, it's a small gesture that makes a big difference for us. And we really appreciate the listeners who do that. Lucas: So back to the divergence — let's look at the ETF level. The Energy Select Sector SPDR, XLE, is up 1.8% on the week. But the oil and gas exploration ETF, XOP, is only up 1.1%. So the broader energy index is being lifted by the refiners and integrated majors, not the pure-play drillers. Luna: And if you look at the clean energy ETFs — ICLN is down 5.3%, TAN down 7% — that's a whole other divergence. But that's probably a topic for another episode. Lucas: For now, the takeaway is: don't paint the oil industry with one brush. The barrel is not a monolith. The refiners are in a sweet spot, and the producers are in a holding pattern. That has real consequences for everything from corporate earnings to what you pay at the pump. And it's going to be interesting to see how long this lasts.