Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Is Falling While Oil Rises in July 2026
Transcript
- Lucas: The headline this morning is that WTI crude is up about a percent and a half over the past five days, sitting at $71.41 a barrel as of this morning. But if you filled up your car this week, you might have noticed something odd: gasoline prices actually dropped. Luna: Yeah, I saw that. Regular unleaded is now $3.78 a gallon nationally, down from $3.83 last week. That's a nice little break at the pump. Lucas: It is, and it seems counterintuitive. Oil is up, gas is down. Usually those two move together. So what's going on? The answer has a lot to do with natural gas. Luna: Natural gas? How does that affect gasoline? Lucas: Great question. Natural gas is a key input for refineries. They use it for heat, for power, and critically for hydrogen production in desulfurization. When natural gas prices fall, refinery operating costs fall. And Henry Hub natural gas has absolutely cratered this week — down 10 percent in five days, now at $2.94 per million British thermal units. Luna: Ten percent in a week is a big move. What's driving that? Lucas: A few things. First, production has been robust — US natural gas output remains near record levels. Second, we're in July, which is typically strong demand season for gas-fired power plants running air conditioning, but this summer has been cooler than expected in key regions like the Midwest and the Northeast. Storage builds have been above average. Luna: So lower power burn means more gas in storage, which pushes prices down. And that flows through to cheaper gasoline. Lucas: Exactly. Refining margins, or crack spreads, have actually widened because the input cost — natural gas — fell faster than gasoline prices. So refineries are still making money, but they're passing some of the savings along to consumers. The other piece is that Brent crude, the global benchmark, is up a bit more than WTI — it's at $76.01, up 2.5 percent this week. That's partly geopolitical. Luna: Right, the headlines out of the Middle East. The US launched airstrikes against Iran after that container ship attack in the Strait of Hormuz. That's a real risk to supply. Lucas: It is, and that's why crude is up. But the gasoline market is more insulated from those supply shocks in the short term because refineries can adjust their crude slates. And the natural gas market is almost entirely domestic — we export some LNG, but the Henry Hub price is driven by US supply and demand. Luna: So the disconnect makes sense. Oil is reacting to a supply scare, gas is reacting to its own fundamentals, and gasoline is caught in the middle. Lucas: That's a good way to frame it. And it's not just gasoline. The whole energy complex is showing these weird divergences. Look at clean energy stocks — the Invesco Solar ETF, TAN, is down 4.5 percent this week even as crude rallies. First Solar fell 2.2 percent, Enphase was basically flat. So the old narrative that high oil prices boost renewables isn't really holding. Luna: No, it's not. And I think that's because the drivers of clean energy are more about policy and technology costs now than about the price of oil. Solar panel prices keep falling, and interest rates are still a headwind for large-scale project financing. Lucas: Right. The ten-year breakeven inflation rate ticked up to 2.24 percent this week, which suggests the market is pricing in slightly higher inflation expectations. That keeps real rates elevated, which is bad for capital-intensive renewables. Luna: And the Consumer Price Index for May came in at 334, up from 332.41 the month before. That's about a 0.5 percent monthly increase, which is still above the Fed's comfort zone. Lucas: So we've got a situation where oil is being lifted by geopolitics, natural gas is falling on its own supply glut, gasoline is benefiting from cheaper refining inputs, and clean energy is getting squeezed by macro factors. It's a lot of moving parts. Luna: Let's talk about the refining sector specifically. The Energy Select Sector SPDR Fund, XLE, is up 3.7 percent this week. ExxonMobil is up 1.8, Chevron up 4.9, ConocoPhillips up 5.3. Refiners seem to be doing well. Lucas: They are, and that's partly because cheaper natural gas boosts their margins. But also because gasoline demand is still solid — summer driving season, even with high prices, people are still taking road trips. The 'funflation' story is real: staying in isn't as cheap as it used to be. Luna: Yeah, I saw that CNBC piece. It's about how at-home entertainment costs have risen — streaming services, groceries, utilities — so the cost advantage of staying home versus going out has narrowed. That might actually support gasoline demand. Lucas: Interesting point. If people feel like they might as well go out since it's not that much more expensive, then gasoline demand stays firmer. And that feeds back into the refining story. Luna: So what's the outlook for gasoline prices? Do we expect them to keep falling? Lucas: It depends on natural gas. If Henry Hub stays around $3 or lower, refineries will keep enjoying lower costs. But if we get a heat wave and power burn spikes, natural gas could bounce. Also, hurricane season in the Gulf could disrupt refinery operations. That would squeeze supply and push gas prices up. Luna: And on the crude side, the Iran situation is fluid. Any escalation in the Strait of Hormuz could send oil much higher, and that would eventually feed into gasoline too. Lucas: Right. Every refiner has a lag — crude that's loaded today takes a few weeks to reach the refinery and become gasoline. So a spike in crude today would show up at the pump in August. Luna: So for now, we get a little relief at the pump, but it might not last. Lucas: Exactly. And that's the kind of thing we try to track closely on this show. You know, we're able to do deep dives like this — looking at the interplay between natural gas, refining, geopolitics, and your wallet — because of the listeners who support us directly. Luna: Yeah, it's a small group, but it makes a big difference. We don't run ads, and that keeps the analysis honest and focused on what actually matters. Lucas: If you've been getting value from these episodes and want to help keep them coming, you can join that group at buy me a coffee dot com slash fexingo. It's completely optional, but it's how the show stays ad-free. Luna: And we really appreciate it. Now, back to the markets — one thing I want to flag is that the oil and gas divergence we're seeing might create some interesting opportunities in the ETF space. Lucas: Tell me more. What are you seeing? Luna: Well, XLE is heavily weighted toward integrated majors and refiners, so it's benefiting from both higher crude and lower nat gas. But the SPDR S&P Oil & Gas Exploration & Production ETF, XOP, is up 3 percent this week. That's a purer play on producers. Lucas: Producers are more sensitive to crude prices than to refining margins. So if crude holds up, XOP could continue to perform. But if the geopolitical risk fades, crude could pull back. Luna: Right. And on the clean energy side, ICLN and TAN are both down this week. The question is whether that's a buying opportunity or a sign of further weakness. Lucas: My take is that clean energy is facing real headwinds from interest rates and policy uncertainty. The Inflation Reduction Act is still in place, but implementation has been slow. And with the CPI still running hot, the Fed isn't cutting rates anytime soon. Luna: So the near-term outlook is challenging. But for a long-term investor, the structural story — electrification, decarbonization — hasn't changed. Lucas: No, it hasn't. But in the short run, the market is all about these crosscurrents. Oil and gas are being driven by very different forces than renewables. And as we've seen today, even within fossil fuels, crude and natural gas can move in opposite directions. Luna: It's a reminder that energy isn't one market — it's a bunch of interconnected but distinct markets. And you have to look at each one on its own terms. Lucas: Absolutely. And that's exactly what we'll keep doing. For now, enjoy the cheaper gas while it lasts. Next week we'll check back on the geopolitical situation and see whether natural gas can hold these lows.