As of the domestic market close on July 28, the fuel oil market opened by digesting the pullback from geopolitical tensions, trading within a range throughout the day. FU09 closed lower at 3503, down 6.1% from the previous session, while LU09 recorded 4613, down 2.6%.
On the geopolitical front, U.S. President Donald Trump stated on July 27 that he has enough patience and time to reach an agreement with Iran, but warned that if a new ceasefire deal is not achieved, the U.S. will resume military strikes against Iran.
From a fundamental perspective, supply data shows an increase in fuel oil shipments from Singapore and the Middle East recently. As of the week ending July 26, according to Reuters vessel-tracking data, the four-week moving average of Singapore Fuel Oil shipments totaled 2.81 million tonnes, up 60% from 1.78 million tonnes in the week ending July 5. Meanwhile, the Middle East's four-week moving average of Fuel Oil shipments reached 10.94 million tonnes, up 20% from 8.97 million tonnes over the same period.
Singapore's supply increase is primarily driven by the recovery of bunkering activities, as evidenced by the notable rise in the BDTI and BDI indices for tanker and dry bulk freight rates. The increase in Middle East supply is largely attributed to internal transfers spurred by high temperatures, with Saudi Arabia's high-sulfur fuel oil imports rising 20% month-on-month.
On the demand side, there are currently supportive factors, including the potential for long-distance vessel voyages after the double-strait blockage, which could add bunkering demand, as well as the peak seasonal phase of high temperatures. Amid expectations of tight supply from geopolitical disruptions, these factors are likely to provide positive support for fuel oil fundamentals.
Currently, fuel oil fundamentals remain relatively tight, but Lufax (LU) is being driven by the structural contradiction in diesel, which has been amplified recently. This suggests fundamentals for LU are stronger than those for FU. At the close of trading, the LU-FU spread stood at 1110, up from the previous settlement spread of 1066. LU continues to fall less than FU.
In the short term, if geopolitical tensions ease into a substantive loosening, the current decline is expected to be more moderate than the previous sharp correction, as demand provides some support. Overall, the short-term direction depends on cost trends, and with geopolitical uncertainty, a wide-range oscillation is expected. For those looking to participate in the market, single-direction bets on the geopolitical risk are too high, so buying deep out-of-the-money put options is recommended.
Asphalt: As of the domestic market close on July 28, BU09 continued to trade on the geopolitical pullback, opening with a gap down and oscillating lower throughout the day, eventually closing at 4087, down 2.04%.
The asphalt structure remains constrained by weak demand. Southern China continues to be affected by heavy rainstorms. After Typhoon Chan-hom, a new typhoon, "Dolphin," is expected to form, but its impact on China is likely limited. Its path should be monitored.
According to data from Longzhong, as of July 28, the spot market price for heavy-grade asphalt in Shandong was 4330 yuan/tonne, down 1.14% from the previous session. The price in East China held steady at 4660 yuan/tonne, while South China saw a slight decline of 0.22% to 4490 yuan/tonne, and Northeast China fell 1.51% to 4570 yuan/tonne.
The spot basis for asphalt has narrowed, pressured by demand constraints and reduced geopolitical support. Spot prices are easing from highs but remain relatively firm. In the short term, cost is the decisive factor. Asphalt's gains have lagged behind crude oil, and the earlier recovery in refining margins led to higher production, which in turn dragged margins lower (reflected in the falling BU-SC spread).
Short-term single-direction trading for asphalt depends on cost, with a wide-range oscillation expected. If geopolitical tensions ease, the downside risk for asphalt is considered safer than for SC, FU, and LU.
Product Spread Trades:
1) Buy BU and sell FU/LU on dips. Over the long term, BU is supported by the unresolved shortage of Venezuelan feedstock.
2) Lightly buy LU and sell FU at low levels (cautious, limited upside). LU is expected to decline less than FU due to support from diesel.
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