Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Solar and Clean Energy Stocks Are Diverging from Oil
Transcript
- Lucas: Oil prices have been relatively steady this week — WTI crude around $79 a barrel, Brent just under $76.50 — but clean energy stocks are sliding hard. The Invesco Solar ETF, TAN, is down nearly two percent over the past five days. First Solar dropped more than six percent. Luna: That's a pretty stark divergence. Normally when oil is stable, renewables tend to hold their ground or even get a tailwind from the energy transition narrative. What changed? Lucas: Right — you'd think steady oil would keep the focus on alternatives. But look at what's happening with natural gas. Henry Hub spot prices are at $3.17 per million BTU, down one and a half percent in the past week. That makes gas-fired power cheaper to run, and it directly undercuts the economics of solar and wind projects. Luna: So cheaper gas is stealing the thunder from renewables. But is it just the gas price, or is there something bigger going on? Lucas: I think there are two main forces. One is interest rates. The core PCE price index ticked up to 130.1 in May, and the ten-year breakeven inflation rate is still around 2.2 percent. That means the Federal Reserve isn't cutting rates anytime soon. Solar farms and wind installations are hugely capital-intensive — they borrow money upfront and pay it back over decades. Higher rates crush the returns on those projects. Luna: That's a really concrete mechanism. So when the cost of capital goes up, the net present value of a twenty-year solar farm just collapses — even if the sun is still free. Lucas: Exactly. And the second force is geopolitical: this afternoon the Supreme Court ruled that President Trump can't fire Fed Governor Lisa Cook for now. That was a headline, but the bigger market mover was the Dow jumping two hundred points on news that the U.S. and Iran are de-escalating hostilities. When geopolitical risk fades, oil stays steady, but the urgency to invest in alternatives also fades. Luna: So the market is basically saying: 'No crisis, no rush to renewables.' That's a tough message for clean energy stocks. Lucas: It is. And it shows up in the subsectors too. Enphase Energy, ENPH, actually rose almost two percent this week — it's bucking the trend because it's more tied to residential solar and battery storage. But First Solar, which builds large utility-scale solar farms, got hammered. That's exactly where the interest-rate sensitivity is highest. Luna: I want to point out something about the oil stocks themselves. The XLE energy sector ETF is down about one percent over five days, but ExxonMobil fell two percent and Chevron dropped three and a half. ConocoPhillips lost over four percent. That's a bigger decline than crude suggests. What's driving that? Lucas: Oil stocks are forward-looking — they're pricing in a weaker earnings environment. Refining margins are compressing, and there's this persistent worry that OPEC+ could add supply later this year. The futures curve for crude is in contango, which means future prices are higher than spot — a sign that traders expect a surplus. So oil equities are selling off on the margin outlook, even though spot oil is still around $79. Luna: Let's bring this back to the clean energy side. If oil stocks are selling off because of earnings concerns, and clean energy stocks are selling off because of rates and cheap gas, is there any good news for renewables right now? Lucas: There is a bright spot — the demand side. AI data centers are exploding, and they need constant, reliable power. NEE, NextEra Energy, is up nearly two percent this week. Utilities are the backbone of that build-out, and NextEra is the biggest player in wind and solar. That long-term demand story is real. Luna: But the market is punishing the pure-play solar manufacturers today. First Solar's drop is brutal. It makes you wonder if the energy transition is hitting a speed bump. Lucas: It's more of a cyclical headwind than a structural reversal. The Inflation Reduction Act tax credits are still in place, states have renewable portfolio standards, and corporate power purchase agreements keep growing. But right now, the macro environment — interest rates, natural gas prices, geopolitical calm — is working against the short-term stock performance. Luna: Let's talk about the natural gas dynamic a bit more. Henry Hub at $3.17 is low but not crazy low. Why is that enough to hurt solar? Lucas: Because the marginal cost of running an existing gas plant is very low once the plant is built. Solar has to compete on a levelized cost basis — if gas is cheap, utilities will dispatch gas first, especially during peak summer demand when solar generation drops in the evening. That pushes the revenue per megawatt hour for solar down. First Solar sells panels to developers who then sell power — if power prices fall, their pricing power erodes. Luna: It's a capital-intensive business on a thin margin. So First Solar gets squeezed from both sides: higher financing costs and lower revenue per panel. Lucas: Right. And the natural gas inventory data from the EIA this week showed a larger than expected build — storage is well above the five-year average. That's putting downward pressure on gas prices, which in turn keeps a lid on power prices. Luna: What about the other side of the pond? Brent is still above WTI by about three dollars. Is that spread telling us anything about global demand for renewables? Lucas: Not directly. The brent wti spread is mostly about transportation costs, inventory levels in Cushing, and export dynamics. But it does reflect that global oil demand is still pretty healthy — not booming, but not collapsing. That sets a floor under energy prices generally. The problem for clean energy stocks is that they need high fossil fuel prices to look attractive on a relative basis. When oil and gas are steady but not spiking, the urgency for substitution drops. Luna: So the right environment for clean energy stocks is actually higher oil and gas prices, not lower. That's a bit counterintuitive. Lucas: Absolutely. The best period for solar stocks was 2021 and early 2022, when oil was surging and natural gas prices shot up. That created a price umbrella — every alternative looked like a bargain. Now we have the opposite: stable oil, cheap gas, and high interest rates. It's a rough mix. Luna: I wonder if investors are also looking at the regulatory landscape. The Supreme Court ruling on the Fed governor is a reminder that the political environment around energy policy is unpredictable. If the administration can't fire a Fed board member, maybe some clean energy subsidies are less at risk? But maybe other permits get blocked? Lucas: That's a good point. The Supreme Court case was specifically about the Federal Reserve — it doesn't directly touch energy regulation. But it signals a broader trend of courts checking executive power. That could be a double-edged sword for renewables: it might protect some tax credits from executive rollback, but it could also block permitting reforms that would make it easier to build transmission lines for wind and solar. Luna: Let's zoom out. If you're a listener with a portfolio — maybe they hold some TAN or individual solar stocks — what should they be watching in the next month? Lucas: Two things. First, the next CPI report due in mid-July. If inflation comes in hotter than expected, rates stay high and renewables get hit again. If it softens, that's a tailwind. Second, watch the natural gas storage reports — if injections start slowing because of summer cooling demand, gas prices could firm up, which would take some pressure off solar. Luna: And on the geopolitical side, any flare-up in the Middle East could reshuffle the deck overnight. Lucas: Yeah, and I think that's the wildcard. Today's headlines about U.S.-Iran de-escalation took the edge off, but the underlying tensions are still there. Any escalation would spike oil, lift the energy complex, and suddenly renewables look more attractive again. But that's a gamble — you don't want to bet on a crisis. Luna: One thing I appreciate about this show is that we don't pretend to have a crystal ball, but we do try to bring clarity to the forces at play. If you find these conversations useful — especially since we keep the show completely free of ads — it really helps when listeners support us directly. Lucas: We deliberately don't run advertisements on Energy Economics or any Fexingo Business show. If you want to help keep it that way, the link is buy me a coffee dot com slash fexingo. No pressure, just a way for listeners who get value out of this to chip in. Luna: And it's a genuine help — it lets us spend more time digging into the data rather than chasing sponsors. That said, back to the divergence between oil and clean energy stocks. Do you think this period of cheap gas and high rates will last through the rest of 2026? Lucas: I think it's going to persist at least through the third quarter. The Fed has made it clear they're in no rush to cut. Natural gas production is still robust, and we're heading into the shoulder season after summer. The real test for clean energy stocks will be the fourth quarter, when year-end tax credit adjustments and seasonal power demand shifts come into play. Luna: So patience is key. We'll keep tracking these numbers in future episodes. For now, thanks for listening as always.