Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Crude Is Falling Despite the Iran Crisis
Transcript
- Lucas: Crude oil just had its worst week since March of 2023. Brent crude closed today at 92 dollars and 90 cents a barrel, down more than 10 percent in five trading sessions. And here's the thing that makes this move genuinely weird — it's happening while U.S.-Iran ceasefire talks are still completely unresolved. Luna: Yeah, that's the part that jumps out at me. Normally when there's active geopolitical risk in the Middle East, oil goes up, not down. What changed? Lucas: What changed is that the market started pricing in a ceasefire extension before the President actually approved it. CNBC had a headline this afternoon — 'Oil prices turn lower as U.S.-Iran ceasefire extension awaits Trump approval.' So the market is basically front-running the diplomacy. Traders are saying: the extension is likely, therefore the risk premium we built in over the past month needs to come out now. Luna: But that's a bit of a gamble, isn't it? The extension hasn't been signed. You'd think there'd be a bid under the market until we actually see ink on paper. Lucas: You would think so, and that's why this move is interesting. I think what we're seeing is a classic 'sell the fact' pattern, except here the 'fact' is a ceasefire that hasn't technically happened yet. We saw a similar setup in 2023 with the Black Sea grain deal — when Russia threatened to pull out, wheat spiked, and then when the deal got extended, wheat sold off hard even though the extension wasn't guaranteed. Luna: So the market's basically saying: we already paid for this risk in April and early May, and now we're taking the chips off the table before the event actually resolves? Lucas: Exactly. And there's a second layer here that has nothing to do with geopolitics. We're seeing a broad rotation out of energy equities and into other sectors. The S&P 500 energy sector — the XLE — dropped 3.6 percent this week. ExxonMobil down over 5 percent. Chevron down over 4. So this isn't just about crude futures; the entire complex is getting sold. Luna: And on the physical side, are we seeing any signs of actual oversupply? I mean, OPEC+ hasn't changed its production quotas recently, right? Lucas: Quotas haven't changed, but we're seeing higher exports from Iraq and Nigeria in the last two weeks — small numbers, but enough to soften the physical market at the margins. More importantly, the futures curve is telling a story. Brent is in backwardation — prompt delivery is still more expensive than forward months — but that backwardation has narrowed sharply. A month ago, the spread between the front month and the six-month contract was around 4 dollars. Now it's under 2. Luna: So the market is saying: the immediate tightness is fading. Even if Iran doesn't flood the market with barrels tomorrow, the fear of that disruption is dissipating. Lucas: Right. And that's actually the most important signal for traders to watch. When backwardation compresses, it often means the physical market is loosening faster than the headlines suggest. The break-even inflation rate on the 10-year Treasury ticked down to 2.39 percent today — that's the lowest we've seen in three weeks. That's the bond market saying: lower energy costs are going to feed into lower headline inflation. That's a big deal for the Fed. Luna: Hmm. So if this selloff continues and oil stabilizes in the mid-80s, does that give the FOMC room to pause or even cut later this year? Because I know the hawks have been pointing to sticky energy prices as one reason to hold rates steady. Lucas: It absolutely does. The core PCE deflator ticked up in the April reading — that came out a few weeks ago — but energy is a big component of headline CPI, and if crude stays around 90 or below, you'll see that flow through to the pump. Regular gasoline is already down about 15 cents from the April peak. So the inflation narrative could shift pretty quickly. Luna: That said, is there a risk that the market is getting too comfortable? I mean, the Iran situation hasn't resolved. A lot can happen between now and a final deal. Lucas: There's always that risk, and that's what makes this week's move so striking. The market is essentially placing a bet that the diplomatic path holds. If it doesn't — if the ceasefire extension falls through — you could see a violent snapback. A 10 percent drop in a week is already a big move. If it reverses on bad headlines, that reversal could be just as sharp. Luna: So is this a buying opportunity for someone who thinks the market is overreacting to the diplomatic news? Or is this the beginning of a larger trend? Lucas: I think the honest answer is: it depends on your time horizon. If you're a day trader, the momentum is clearly down — you wouldn't step in front of a freight train. But if you're looking out six to twelve months, the fundamental thesis for oil hasn't changed that much. Global inventories are still below the five-year average, spare capacity is concentrated in a few countries, and demand is still growing, albeit slowly. The risk premium that came out this week could easily come back. Luna: Alright, so let's talk about that risk premium for a second. You mentioned the grain deal analog earlier — but in that case, the premium was actually justified because the deal eventually did collapse for a while. Is there a scenario where the market is just wrong about the Iran extension? Lucas: Absolutely. The market can be wrong for weeks. And if you look at the options market, there's still a significant skew toward puts — traders are paying up for downside protection even as prices fall. That tells me there's still a lot of uncertainty. It's not like everyone is suddenly bullish on peace. It's more that the marginal seller overwhelmed the marginal buyer this week, and when you have a liquidity vacuum, prices can drop faster than fundamentals justify. Luna: Speaking of marginal sellers, was there any specific catalyst today that accelerated the move? I saw volume was pretty high on the Brent contract. Lucas: Yeah, there was a big options expiration tomorrow — about 50,000 Brent options set to expire at the 95 dollar strike. As the spot price fell below 94, a lot of those calls became worthless, and the dealers who had sold them had to delta-hedge by selling more futures. That creates a feedback loop: lower spot triggers more hedging, which pushes spot lower. That's probably why we saw the selloff accelerate in the last hour of trading. Luna: Right, so there's a technical element to this beyond just the Iran headlines. That makes the move a bit less mysterious. Lucas: Exactly. We're looking at a confluence of three forces: diplomacy front-running, options gamma, and a broad rotation out of energy stocks. Any one of those alone might have produced a 3 or 4 percent decline. Together, they produced 10 percent. And I think it's important for listeners to understand that a 10 percent weekly move in crude is rare — it happens maybe once or twice a year — so this is genuinely an unusual event. Luna: You know, listening to you break this down, I realize something. I think a lot of people assume that commodities markets are purely about supply and demand — you know, barrels in the ground versus cars on the road. But episodes like this one remind you how much of the price action is driven by positioning, by narratives, by what traders expect other traders to do. And that can feel disconnected from the physical reality. Lucas: That's exactly right, and I think that's one of the most valuable things about following a show like this. We walk through the economy together, we look at the numbers, we try to understand what's really moving prices — not just the headlines, but the mechanics underneath. And you know, that kind of thinking takes time and attention. It's the kind of thing we try to bring to every episode because we genuinely believe that understanding how markets work is part of being an informed citizen. Luna: And we deliberately keep this show free of ads because we want that understanding to be accessible to anyone who's curious. We're not selling anything. If that model resonates with you, and you want to support it, you can find us at buy me a coffee dot com slash fexingo. That's it — no pressure, no perks, just a way to help keep the conversation going. Lucas: Absolutely. And speaking of the conversation, let's look ahead. Tomorrow we get the EIA weekly petroleum status report, and the market is expecting a crude draw of about 1.5 million barrels. If we see a bigger draw than that — say 3 million or more — it could put a floor under prices, at least temporarily. But if we see a build... well, then this selloff might have further to run. Luna: What about the product side? Gasoline and distillate inventories have been tight. Is there any chance that the crude selloff actually improves refinery margins and leads to stronger demand for crude down the road? Lucas: That's a good point. Crack spreads — the difference between crude and product prices — have widened this week because gasoline hasn't fallen as much as crude. That means refineries have an incentive to process more barrels, which could eventually tighten the crude market. So in a weird way, the faster crude falls, the more it sows the seeds of its own recovery. It's a contrarian argument, but it's grounded in real refinery economics. Luna: So we could see a bounce next week if the EIA data confirms that refineries are cranking up runs. But it's not guaranteed. Lucas: Nothing is guaranteed in this market, which is kind of the point. We're in a period where the usual relationships between geopolitics, supply, and price are breaking down. That's uncomfortable if you're a trader, but it's fascinating if you're a student of how markets work. And that's where I think we'll leave it for today — keeping an eye on the EIA report, watching the backwardation, and remembering that in commodities, the only constant is that the story never stays the same for long.