The fuel oil market exhibited a consistent downward trend throughout November. The FU2601 contract fell from 2,854 RMB/ton to around 2,426 RMB/ton, while LU2601 declined from 3,341 RMB/ton to 2,963 RMB/ton (as of November 26). When prices exhibit a one-way trend, risk management demand from the physical industry surges. Open interest in high-sulfur fuel oil increased from 440,000 lots to 630,000 lots, while low-sulfur fuel oil open interest rose from 140,000 lots to 180,000 lots. Amid heightened geopolitical uncertainty and significant global macroeconomic variables, the physical industry's proactive use of derivatives markets for risk management will significantly enhance corporate resilience.
The unilateral decline in fuel oil prices was primarily driven by relative weakness in the crude oil market. As new developments emerged in Russia-Ukraine negotiations, oil price risk premiums narrowed. Following earlier U.S. sanctions escalation, Russian oil buyers reduced purchases to mitigate risks. With the transition period ending, short-term import declines from major buyers may occur. However, should future tensions ease, risks diminish, or new supply channels emerge, buyers are expected to gradually return. Current market concerns over oversupply remain unabated, with future focus shifting to potential marginal changes in production policies at the upcoming OPEC+ meeting.
The fuel oil market exhibits structural divergence. The spread between high- and low-sulfur fuel oil prices has gradually rebounded from bottom levels, rising from $60/ton to above $90/ton. This upward movement in the spread is primarily driven by declining high-sulfur cracking margins rather than rising low-sulfur cracking margins. The low-sulfur fuel oil market remains fragile, with its earlier brief recovery failing to sustain momentum. The current extremely low crack levels have approached refinery economic thresholds, likely triggering passive supply contraction to rebalance the market—a process requiring time to unfold. Notably, Kuwait Petroleum Corporation halted low-sulfur fuel oil exports in November, potentially signaling the start of supply adjustments.
The high-sulfur fuel oil spot market exhibits pronounced marginal weakness, with both monthly spreads and spot premiums showing sluggish trends. This relative weakness is closely tied to the sustained strength in refined product cracks, particularly medium distillate cracks. The robust refined product cracks have prompted refineries to increase operating rates, passively boosting high-sulfur fuel oil supply. Meanwhile, Asia, as the primary consumer of high-sulfur fuel oil, is seeing a gradual decline in marginal demand for this product. Trade flow data tracking indicates that Asian imports of high-sulfur fuel oil declined from a peak of 2.9 million tons in June to just 2.3 million tons in November.
On the demand side, the latest data from the Maritime and Port Authority of Singapore shows that marine fuel oil sales in October reached 4.82 million tons, a slight year-on-year decrease of 1.2%. However, cumulative sales from January to October still maintained a year-on-year growth of 1.7%. This indicates that marine fuel oil demand has demonstrated resilience amid contained downside risks to global trade activity. With low-sulfur fuel oil remaining relatively weak, sales of low-sulfur marine fuel oil saw a slight month-on-month increase in October. Considering the suspension of tariff escalation, downside risks to marine fuel oil demand have been partially mitigated.
Looking ahead, the fuel oil market remains in a rebalancing phase. The crack spread for low-sulfur fuel oil is currently at the bottom of its cycle. As refineries reduce low-sulfur fuel oil supply, its crack spread is expected to gradually recover upward. The future trajectory of high-sulfur fuel oil may be significantly influenced by the outcome of Russia-Ukraine negotiations. Should a peace agreement be reached, Russian high-sulfur fuel oil exports are projected to increase, posing further downside risks to the high-sulfur fuel oil market.
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