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CITIC Futures: Geopolitical cooling, high-sulfur fuel oil geopolitical premium declines
That week, the crack spread for low and high sulfur fuel oil slightly retreated but remained at seasonal highs.
The current core driver for high sulfur fuel oil is geopolitics; the Strait of Hormuz blockade caused a sharp drop in fuel oil supply in the Asia-Pacific region after May.
Close attention should be paid to the resumption of navigation through the Strait of Hormuz and the progress of US-Iran negotiations.
Geopolitical escalation-driven supply and demand gaps are expected to cause significant price surges.
Subsequently, focus on the negative feedback after the price surge:
High sulfur fuel oil prices increase sharply, significantly worsening its economic viability for power generation and feedstock use.
Sales of low and high sulfur ship fuel in Fujarah and Rotterdam decline notably, indicating a strong negative feedback in shipping fuel demand.
The crack spread for low sulfur fuel oil remains high; data from Steel Union shows domestic low sulfur fuel oil output in May increased significantly year-on-year (month-on-month -3.33%, year-on-year +18.49%).
High profit margins drive a notable increase in production, and exports of low sulfur fuel oil from Nigeria and Brazil are rising.
Low sulfur fuel oil has strong primary product attributes; during crude oil price increases, the crack spread for low sulfur fuel oil tends to rise easily and fall difficultly.
However, caution is needed as the potential for production to return to high profit-driven levels may exceed expectations.
(Zhongxin Futures)