The cost side has broken through to extremely high levels, pushing fuel oil markets upward. Geopolitical tensions continue to escalate following the delay of a key meeting between Iran and Gulf states, compounded by significant damage to Saudi Arabia's East-West pipeline after a Yemeni militant attack.
Domestic SC prices surged past 900 yuan per barrel, providing strong support for the fuel oil complex. On September 14, during domestic daytime trading, FU11 settled at 4,392 yuan per tonne, up 2.33% from the previous session, while LU11 closed at 5,515 yuan per tonne, gaining 0.51%.
Fundamental data showed notable shifts across key metrics. The FU month spread (front-to-third month) closed at 390, up 23% day-on-day, while the LU spread settled at 484, a gain of 11%. In Singapore, high-sulfur fuel oil (HSFO) premiums doubled to $54.24 per tonne from $24.17 last Friday, whereas low-sulfur fuel oil (LSFO) premiums eased 12% to $33.7 per tonne, down from $38.3.
Crack spreads deteriorated significantly as SC prices outpaced product gains. The FU-SC*7.33 spread narrowed further to -2,239, while LU-SC*7.33 fell to -1,116, with the high-sulfur crack bearing the brunt of the compression. European diesel cracks ticked up 1.3% to $94.18 per barrel. The domestic FU11-LU10 price differential widened to 1,310 from 1,267.
Looking ahead, short-term geopolitical developments remain the dominant driver. The pace of premium unwinding hinges on whether Gulf regional talks signal any de-escalation regarding the Strait of Hormuz. High-sulfur fuel oil is likely to underperform low-sulfur, as evidenced by the steep drop in HSFO-SC crack margins. Still, some further expansion in the LU-FU spread appears possible.
Overall, chasing single-sided positions at current highs offers limited reward-to-risk, with wide-ranging consolidation expected at elevated levels. We suggest selling high-sulfur fuel oil far-month contracts on rallies, prioritizing higher entry prices. Shandong independent refinery margins have also retreated into the 100 yuan profit range.
Turning to bitumen, BU10 settled at 5,558 yuan per tonne on September 14, up 2.66% day-on-day, amid volatile trading near historical highs. The front-to-third month spread strengthened another 27% to 792, with the cash-and-carry window continuing to expand at elevated levels. Spot prices across major regions remained near 6,000 yuan per tonne, with Shandong heavy-grade bitumen averaging 5,955 yuan, up 2%. The East China-Shandong differential widened to 220 yuan, while South China-Shandong stood at 50 yuan, opening slight arbitrage opportunities in buying Shandong and selling East China. The basis firmed further to a positive 392 yuan as futures continue to chase spot values.
Cross-commodity arbitrage saw BU10-FU11 widen to 1,166 yuan per tonne from 1,075 previously. Bitumen fundamentals remain robust, and if futures align with spot momentum, BU10 could approach 5,800 yuan amid current geopolitical intensity. However, caution is warranted on potential demand destruction from elevated prices—watch for a spot inflection point. While we retain a cautiously optimistic stance, the BU-FU spread has limited further upside and appears crowded. For those holding earlier long positions at lower levels, consider taking profits; new entrants should adopt light positions.
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