Fuel oil futures experienced a sharp intraday reversal on September 2nd, with the cash premium easing from its recent highs, as geopolitical tensions continued to drive market sentiment. During the domestic daytime trading session, FU11 settled at 3,970 yuan per tonne, up 4.23% from the previous close, while LU10 finished at 5,184 yuan per tonne, marking a 2.98% gain. The core driver remains geopolitical risk, as US forces launched another major airstrike on Iranian Revolutionary Guard targets at midnight Beijing time on September 2nd. President Donald Trump described the attack as "large-scale and powerful," threatening even more severe strikes if Iran retaliates. Meanwhile, Iran's parliamentary speaker declared that American vessels would not be permitted to pass through the southern corridor of the Strait of Hormuz. On the same day, two Very Large Crude Carriers came under attack in the strait.

Looking at the high-low sulfur spread, the LU10-FU11 closing price differential registered 1,214 yuan per tonne on September 2nd, slightly down from 1,239 yuan per tonne the previous day. On the fundamental side, the FU spot-to-third-month contract spread stood at 271 yuan per tonne as of September 2nd, up nearly 60 yuan per tonne from the prior session, while the LU spread widened by approximately 30 yuan per tonne to 349 yuan per tonne. Although the fuel oil term structure remains in backwardation, the extreme strength has moderated somewhat compared with recent sessions.

According to Reuters data, the Singapore high-sulfur 380cst premium reached $32.79 per barrel on September 1st, up nearly $3 per barrel day-on-day, though this represents a pullback from the near $40 per barrel peak recorded on August 25th. The low-sulfur 0.5% premium stood at $38.41 per barrel, up nearly $5 per barrel, but also narrowing from the peak of nearly $63 per barrel reached on August 14th. In terms of the East-West spread, the Singapore-Rotterdam high-sulfur differential registered $53 per barrel on September 1st, a substantial retreat of $30 per barrel from elevated levels.

The data suggests that the upside momentum in the physical market remains limited, with the futures market largely reflecting speculative positioning driven by geopolitical sentiment. While Eastern markets remain tighter than their Western counterparts, the intensity of tightness has also moderated. Weak demand signals are providing some relief to the strong physical fundamentals. Recent inventory builds in Singapore and the ARA region point to softening bunker fuel demand growth and weak power generation demand feeding into stock accumulation. As domestic refining margins have opened up, previously contracted cargoes have been arriving at ports, adding to supply availability.

Where the market goes from here

The key question for the market going forward is whether transit conditions through the Strait of Hormuz improve. If dark shipping and ship-to-ship transfers become the norm, the tight supply expectations could transition into a more relaxed sentiment. Conversely, if strict controls on the strait persist, the tight physical reality will continue to pose upside risks. With South Asian power generation demand gradually winding down and insufficient incremental bunker fuel demand growth, any demand support may have to rely on refining feedstock requirements, which would ease the tightness in the fundamentals. However, geopolitical risks remain prone to repeated fluctuations, making positions on either side of the market difficult to manage. At current levels, chasing upside momentum requires caution.

Bitumen market shows resilience on cost support

The bitumen market displayed notable strength, with BU10 settling at 4,974 yuan per tonne on September 2nd, up 1.43%, after briefly breaking above the 5,000 yuan mark before retreating from session highs. The BU10-FU11 spread closed at 1,004 yuan per tonne on September 2nd, down from 1,146 yuan per tonne the previous day. The fundamental backdrop is anchored by cost support and supply contraction forming a strong floor, while the anticipated demand surge during the peak construction season adds a bullish undertone. On the cost side, which remains the core driver, the escalation of US-Iran tensions has restricted navigation through the Strait of Hormuz, keeping international crude prices elevated and providing support to bitumen. On the supply side, domestic bitumen refinery capacity utilization stood at only approximately 22% for the week ending August 28th, a historically low level. Domestic bitumen output registered 361,000 tonnes, down 8% week-on-week. September production schedules indicate further declines, reinforcing expectations of supply contraction.

On the demand front, shipments from domestic bitumen samples totaled 327,000 tonnes for the week ending August 28th, essentially flat from the prior week. Rainfall in some southern regions continues to disrupt road construction activity, while tight end-user funding constrains purchasing enthusiasm, resulting in slower realization of underlying demand. However, market expectations for the traditional "golden September and silver October" construction season remain optimistic, with preliminary signs of catch-up demand emerging in northern regions. Modified bitumen operating rates have ticked higher, suggesting demand is improving at the margins. On inventories, combined domestic bitumen production and social inventories fell to 780,000 tonnes for the week ending August 28th, down 11% sequentially. With demand recovery expectations building, inventories continue to draw down. The bitumen market currently sits in a supportive configuration of cost support, supply contraction, and demand recovery, though high prices pose a constraining factor on demand at the upper end. In the near term, cost dynamics will be the decisive factor. Should geopolitical tensions ease, bitumen's downside risk appears better cushioned compared with crude oil, fuel oil, and low-sulfur fuel oil. The market is expected to trade in a wide range over the short term. For spread trading, a rolling long BU/short FU strategy remains the preferred approach.