Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Oil Stocks Are Surging While Crude Stays Flat
Transcript
- Lucas: WTI crude is at ninety-three twenty a barrel, essentially flat over the past week. Brent, ninety-five thirty-one, barely changed. And yet the XLE, the energy sector ETF, is up four and a half percent over the same five-day stretch. Luna: That is a disconnect. Stocks moving hard while the underlying commodity does nothing. Lucas: Right. And it's not just the ETF. ExxonMobil up five-point-one percent. Chevron up three-point-six. ConocoPhillips up four-point-three. So the question is, what is the stock market seeing that the oil futures market isn't? Luna: Before we dig into that, I'll say, if walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these going. Lucas: Yeah, buy me a coffee dot com slash fexingo, if you've gotten something out of them. Small amounts, real difference. Luna: Exactly. Now back to that divergence — so the oil price is range-bound, but energy stocks are acting like crude just hit a hundred. Lucas: Well, the market is rewarding something other than the spot price. And I think the story here is about what companies are doing with their cash. Look, for years, energy companies were judged by how much they could produce. Growth in barrels per day. But after the 2020 crash and then the 2022 windfall, the whole industry shifted. They stopped spending on new production. They started returning cash to shareholders. Luna: And that shift is now baked into valuations. The market sees steady buybacks and dividends — not volatile drilling programs. Lucas: Exactly. So when crude sits at ninety-three and doesn't fall, it's a signal that the cash flow is stable. Companies can maintain or even increase those buybacks. And that's what investors are pricing in. The XLE is up four and a half percent this week because the narrative is about capital discipline, not about the next rig count. Luna: But isn't there a risk that oil prices eventually fall and those buybacks disappear? I mean, if crude drops to seventy, the math changes. Lucas: Absolutely. And that's why the futures market matters. The forward curve is telling us something. Right now, Brent for delivery in twelve months is around eighty-seven, so the market expects prices to ease a bit, but not plunge. The backwardation — where near-term futures are more expensive than later ones — has narrowed. But it's still there. So the stock market is basically saying, 'We believe management when they say they'll keep buybacks even if crude dips into the eighties.' Luna: And that's a bet on management credibility as much as on oil prices. Lucas: Yes. And look at Exxon specifically. They announced a thirty-billion-dollar buyback program last year. They're on track to execute it. Their dividend yield is around three-point-two percent. So investors are treating it almost like a utility stock with upside optionality on crude. That's a big shift from five years ago, when Exxon was seen as a pure commodity play. Luna: So the market is effectively saying, 'We don't need crude to rally. We just need it not to crash.' Lucas: That's exactly right. And the data this week supports that. WTI has been between ninety-two and ninety-four for the past two weeks. It's not breaking out, but it's also not collapsing. Meanwhile, the headline risk around Iran and Hormuz has actually eased — there was that news about ships coordinating with the U.S. Navy to exit the Strait. So the geopolitical premium is coming out, but prices are holding. Luna: That tells you the physical market is genuinely tight. Not panic tight, but supply is not abundant. Lucas: Right. And OPEC+ isn't adding barrels quickly. They've been very deliberate. So you have this equilibrium where crude doesn't go up, doesn't go down, and the stocks just grind higher because the cash flow machine is working. Luna: Is there any sign that the market is getting ahead of itself? Energy stocks are up big over the past year. Lucas: Valuations are not cheap anymore. The XLE is trading at about fifteen times forward earnings. For context, the S&P 500 is around twenty-one. So energy is still a discount, but not the screaming bargain it was in 2020. The risk is that if oil does break down — say WTI drops below eighty-five — then those buyback promises might get scaled back, and the multiple compression could be sharp. Luna: So the trade is really a bet on stability. Not on a rally. Lucas: Exactly. And that's why the flatter futures curve is actually a positive for these stocks. When the curve was in steep backwardation, refiners and producers had to keep reinvesting to capture those high near-term prices. Now, with less backwardation, there's less pressure to drill. They can just harvest cash flow. And the market loves that. Luna: It's almost like the oil stock playbook has become more like a bond proxy. Steady income, limited downside, modest upside. Lucas: Yeah, and that's a really interesting development. It means that even if crude stagnates, these stocks could continue to outperform because the return of capital is so large relative to the share price. Exxon alone will buy back roughly four percent of its outstanding shares this year. That's a structural tailwind. Luna: So for someone listening, what's the takeaway? Is it worth looking at energy stocks now? Lucas: I think the key is to understand the risk you're taking. If you buy an energy stock today, you're not betting on crude hitting a hundred. You're betting that management will continue to prioritize buybacks and dividends over growth. That's a different kind of commodity thesis. And so far, they've earned that trust. Luna: But if the macro environment shifts — if we get a recession and oil demand drops — those buybacks get cut fast. Lucas: Absolutely. And that's the other side of the story. The market is pricing in a soft landing. If that doesn't materialize, energy stocks could fall faster than crude itself, because you'd have a double hit: lower cash flow and multiple compression. But for now, the dance continues. Luna: Alright, so watch the oil stocks, watch the buyback announcements, and keep an eye on the futures curve. Lucas: Exactly. And maybe most importantly, watch whether crude can hold above ninety. That seems to be the line in the sand for this whole narrative.