At the close of domestic afternoon trading, the main FU 09 contract opened higher but then retreated, experiencing a slow afternoon recovery to ultimately settle at 3563, representing a decline of 0.39% from the previous settlement price. The main LU09 contract also opened higher, with a more limited retreat, and its afternoon rally pace outpaced that of high-sulfur fuel oil, finishing at 4574 for a 0.90% increase from the settlement price. The near-to-far contract structure remains in backwardation.
For low-sulfur fuel oil, from a cost perspective, ongoing geopolitical tensions provide a degree of support. Today's performance showed low-sulfur diverging from the declines seen in SC, FU, and BU, closing higher in the final session with strong buying interest. In reality, the Middle East is a crucial supply region for fuel oil. Expectations of tightening external supply due to geopolitical factors apply to both low and high sulfur grades, serving as a sustained driver for their upward price movements. However, judging by the low-to-high sulfur spread, its expansion rate remains relatively contained, primarily because FU's gains have been substantial. There is potential for LU to catch up to FU's price increases. Additionally, with strong overseas gasoline and diesel crack spreads and Russia's announced ban on diesel exports until the end of July, refinery operations could affect low-sulfur supply. The blending components for low-sulfur fuel oil include low-sulfur residue, VGO, and catalytic cycle oil. When diesel crack margins are high, refineries may reduce the provision of these components, thereby tightening low-sulfur supply and amplifying its price upside. Currently, European diesel cracks have reached near four-year highs, warranting caution regarding potential demand destruction from elevated prices, which could subsequently pressure low-sulfur fuel oil.
As for asphalt, at the domestic afternoon close, the main BU 09 contract showed weak upward movement, settling at 4063 for a slight 0.37% dip from the settlement price. Its upward momentum has slowed, facing significant resistance overhead. Its decline was more restrained compared to SC. The BU-Brent crack spread has retreated from recent highs, mirroring a similar pattern seen in the BU-FU crack spread.
Furthermore, recent analysis of Shandong diesel refining margin data and asphalt price trends reveals a notable correlation. The diesel margin data is considered inversely; the underlying logic is that diesel and asphalt are co-products. When diesel margins are high and output increases, asphalt production typically rises as well, potentially depressing asphalt prices. Given that domestic gasoline and diesel markets have been weaker than overseas markets recently, diesel margins have not increased but rather declined, providing supportive guidance for asphalt's absolute price level. This indicator is worth monitoring. Currently, spot asphalt quotations appear more prone to increases than decreases. Basis remains at elevated levels, with the backwardation structure reflecting current spot tightness against expectations of future supply ease. Opportunities may exist in monitoring and potentially trading the spread expansion between the September and December contracts during the roll period.
Inter-commodity arbitrage opportunities:
One strategy involves buying BU on dips while selling FU or LU. Over the longer term, BU faces unresolved supply constraints related to feedstock from Venezuela.
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