Main Viewpoints:
High Sulfur: September sees weakening demand for high sulfur power generation, with blending demand also declining alongside weaker gasoline consumption, leaving the demand side lacking growth drivers. On the supply side, the market expects OPEC+ to halt production increases in October and begin a second round of increases in Q2 next year. If this occurs, the impact on oil prices will mainly reflect in forward contracts, while short-term supply impacts are primarily driven by geopolitical tensions and sanctions. Russia-Ukraine negotiations face numerous unresolved issues, mutual attacks continue, exposing Russian energy infrastructure to risks. Additionally, sanctions imposed by Trump to promote ceasefire significantly affect Russian crude oil and high sulfur supply. Medium-term, the bearish view on high sulfur fundamentals remains unchanged, but attention should be paid to periodic market movements driven by geopolitical tensions and sanctions.
Low Sulfur: Domestic refinery production enthusiasm remains low, with ample remaining quotas, making Q4 quota tightness unlikely, potentially eliminating the need for a third batch of quotas. After peak power generation season ends, Kuwait's low sulfur exports are expected to increase. Furthermore, Nigeria's RFCC unit is scheduled for maintenance in October, creating supply-side increment expectations. On the demand side, low sulfur faces substitution pressures from high sulfur and clean energy, leading to expected weakening of low sulfur fundamentals going forward. ARA diesel inventories have risen consecutively and returned to median levels. Considering the EU's ban on importing Russian oil-processed diesel starting January next year, Europe has restocking needs in Q4, combined with winter heating demand, keeping European diesel fundamentals tight, supporting low sulfur valuations.
Fundamental Analysis:
Crude Oil On August 3, OPEC+ decided to increase production by 547,000 barrels per day in September. Since April's production increase, OPEC+ completed its 2.5 million barrel per day production target within six months. The market expects OPEC+ to pause the 1.66 million barrel per day production increase plan, with restart timing possibly in Q2 next year. Attention should be paid to OPEC+ member statements on September 7. In August monthly reports, EIA raised 2025 OPEC+ crude production and global crude inventories, while IEA slightly lowered 2025 global oil demand while increasing supply forecasts. Both reports raised crude inventory build expectations. According to OPEC's monthly report, July OPEC+ production increased by 308,000 barrels per day compared to the planned increase of 411,000 barrels per day, indicating OPEC+ actively fulfilling production increase commitments.
On August 15, Trump and Putin held talks in Alaska but failed to advance Russia-Ukraine meetings. Trump threatened that if no progress is made by early September, the US would impose sanctions or secondary tariffs on Russia. On September 2, Europe's price cap policy on Russia took effect, lowering Russian crude purchase prices from $60/barrel to $47.6/barrel. The UK joined this action, maintaining gasoline and diesel price caps at $100/barrel and fuel at $45/barrel. This marks the EU's 18th sanctions package since the Russia-Ukraine conflict. Beyond price caps, the EU severed 20 Russian banks from the SWIFT international payment system, banned imports of Russian oil-processed products (effective January 21, 2026), significantly impacting India and Turkey, sanctioned Nord Stream gas pipelines, and added sanctioned vessels. Currently, over 440 vessels are under sanctions. Ship brokers estimate the shadow fleet size at 1,200-1,600 vessels, representing one-fifth of global tankers. Due to sanctions impact and tightened second-hand ship reviews, shadow fleet growth has slowed this year.
From late July to mid-August, Ukraine launched drone attacks on Russian energy infrastructure. On August 2, Ryazan refinery (51.8 thousand tons/day) and Novokuibyshevsk refinery (23.6 thousand tons/day) were attacked. On August 7, Afipsky refinery was attacked, reducing crude processing by 45,000 barrels per day. On August 10, Saratov refinery (20 thousand tons/day) was attacked. On August 14, Lukoil's Volgograd refinery (46.6 thousand tons/day) was attacked. On August 15, Rosneft's Syzran refinery (24.2 thousand tons/day) was attacked. Reuters estimates Ukrainian attacks disrupted 17% of Russian refining capacity. To ensure domestic energy security, the Russian government extended gasoline export restrictions through September 30. In August, Ukraine attacked the Druzhba (Friendship) oil pipeline three times: attacking Unecha pump station on August 13, Nikolskoye pump station on August 18, and Unecha pump station again on August 21. The pipeline's southern section primarily supplies crude to Hungary and Slovakia at approximately 220,000 barrels per day, while Kazakhstan transports crude to Germany via the northern section. With declining Russian refinery processing, crude exports are expected to increase. Kpler estimates Urals crude exports increased by approximately 10-12 vessels.
After the 2022 Russia-Ukraine war outbreak, India became a major buyer of Russian oil. In the first half of this year, India purchased 1.8 million barrels per day from Russia, with current purchases at 1.4-1.6 million barrels per day. On August 27, US 25% tariffs on India took effect as part of US pressure on Russia. Combined with 25% tariffs effective August 7, total tariffs on India reach 50%. To reduce 25% tariffs, India will decrease Russian oil purchases.
In June, due to Israeli-Iranian conflict, Israel's Leviathan gas field temporarily closed, prompting Egypt to issue a 2 million barrel fuel oil purchase order. In late June, Israeli gas fields resumed operations. Additionally, in July, Egypt added Energos Eskimo and Energos Power regasification units, increasing LNG import capacity and LNG power generation, leading to cancellation of the 2 million barrel fuel oil import order. Egypt signed new agreements with Israel to purchase Leviathan gas field natural gas from 2026-2040 in two phases: first phase supplying 20 billion cubic meters, second phase 110 billion cubic meters. Israeli pipeline gas to Egypt is cheaper than LNG.
European diesel inventories rose for three consecutive weeks, but local diesel remains tight due to continuous PMI increases in Europe this year indicating strong economic demand, US refineries entering maintenance season, and Ukrainian attacks on five Russian refineries in early-to-mid August, reducing US and Russian diesel exports to Europe. FGE estimates European diesel supply gaps in September-October will increase by 600,000 barrels per day compared to July-August.
US Market In August, US refinery capacity utilization increased 1.25% month-over-month, distillate fuel production increased 2.1%, residual fuel production decreased 8.8%, and residual fuel inventories decreased 3.4%. In September, US secondary processing unit maintenance declined, expecting increased high sulfur feedstock demand. On July 25, the US Treasury reauthorized Chevron's license. Venezuelan crude shipments to the US resumed in August after a two-month interruption, correspondingly reducing Venezuelan crude shipments to China, Singapore, and Malaysia.
Singapore Market August Singapore high sulfur arrivals decreased month-over-month, mainly due to reduced supplies from Russia, Iraq, and UAE. August Middle East high sulfur net exports reached 140,000 tons, with Saudi high sulfur net imports at year-high levels. However, entering September, weakening power demand is expected to reduce Saudi high sulfur net imports. August Singapore low sulfur arrivals increased significantly, with Indonesia and Nigeria contributing main increments. August Kuwaiti low sulfur fuel oil shipments to Singapore and Malaysia increased substantially, reflecting in Singapore's September arrivals. Nigeria's Dangote refinery plans to increase CDU capacity from 650,000 to 700,000 barrels per day by year-end. During upgrades, low sulfur production will decline, and its RFCC unit is scheduled for 40-day maintenance in October.
This month Singapore average inventories increased 2.3% month-over-month, at historically high levels. For shipping, July Singapore port container throughput increased 4.3% month-over-month. July Singapore marine fuel sales increased 6% year-over-year and 7% month-over-month. Low sulfur fuel oil sales increased 3% month-over-month, high sulfur fuel oil sales increased 15% month-over-year, and biofuel blend sales decreased 24% month-over-month.
China Low Sulfur Fuel Oil Fundamentals The first batch of 2025 low sulfur fuel oil export quotas allocated 8 million tons. On March 28, the second batch allocated 5.2 million tons, increasing 1.2 million tons month-over-month. In July, Sinopec applied to convert 700,000 tons of low sulfur quotas to refined product quotas, CNOOC applied to convert 700,000 tons of refined product quotas to low sulfur quotas, and CNPC applied to convert 200,000 tons of low sulfur quotas to refined product quotas, reducing low sulfur quotas by 200,000 tons. July refinery production reached 1.019 million tons, decreasing 3.8% month-over-month. January-July major refinery low sulfur production was low, declining 19.2% year-over-year cumulatively, relying on import supplements. January-July low sulfur quota utilization was approximately 55%, indicating ample second-half quotas compared to last year, with third batch quotas potentially unnecessary. July bonded marine fuel exports declined significantly, while bonded marine fuel imports increased 18% month-over-month, with notable high sulfur increments. August bonded low sulfur marine fuel production was approximately 1.05 million tons, increasing slightly month-over-month.
China High Sulfur Fuel Oil Fundamentals August China high sulfur arrivals decreased 50% month-over-month. On August 21, US sanctions list added new entities and vessels, including two terminal operators at Yangshan and Dongjiakou, obstructing China's high sulfur imports. Coking unit operating rates remained stable month-over-month, with unit profits declining. Considering increased tariffs and reduced consumption tax deduction ratios, refineries' high sulfur processing economics are poor. After peak refined product consumption season ends, feedstock demand weakens. On July 25, Chevron regained licenses, reducing Venezuelan crude shipments to Asia in August. September China high sulfur arrivals increased notably, mainly at Dongjiakou.
Valuation Analysis:
Low Sulfur Fuel Oil August Middle East power generation peaked. After news of Egypt increasing LNG power generation and canceling fuel oil orders, high sulfur began trading on weakening power demand logic. August 3 OPEC+ meeting decided September production increase of 547,000 barrels per day, bearish for high sulfur valuations. Additionally, Singapore inventories remained seasonally high. For low sulfur, domestic major units showed low production enthusiasm, while European diesel remained strong, strengthening low-high sulfur spreads. In early August, crude prices continuously tested July support levels, passively strengthening low sulfur cracks. Later, factors including US sanctions on Chinese port operators and Fed rate cut expectations supported crude price rebounds, weakening low sulfur cracks.
High Sulfur Fuel Oil August high sulfur prices declined then rebounded. OPEC+ continued production increases, completing first-round increases one year ahead of schedule. With gasoline demand peak season nearing end and US non-farm employment data disappointing, three major institutions raised inventory expectations, causing high sulfur prices to decline with crude while cracks passively strengthened. Market attention then shifted to Russia-Ukraine issues. August 15 US-Russia talks achieved no substantial progress, making direct Russia-Ukraine meetings unlikely, with Trump announcing punitive measures. August 21 US sanctions list added new entities and vessels, including two terminal operators at Yangshan and Dongjiakou, obstructing China's high sulfur imports. Combined with attacks on Russian refineries, high sulfur rebounded. Under weakening demand expectations, bearish trends for crude and high sulfur remain unchanged, but ongoing geopolitical conflicts and sanctions amplify market volatility.
Xinhu Views:
High Sulfur: September sees weakening high sulfur power generation demand, with blending demand declining alongside weaker gasoline consumption, leaving demand side lacking growth drivers. Supply-side, markets expect OPEC+ to halt production increases in October and begin second-round increases in Q2 next year. If so, oil price impacts mainly reflect in forward contracts, while short-term supply impacts are driven by geopolitical tensions and sanctions. Russia-Ukraine negotiations face many unresolved issues, mutual attacks continue, exposing Russian energy infrastructure to risks. Additionally, Trump's sanctions to promote ceasefire significantly impact Russian crude and high sulfur supply. Medium-term, bearish high sulfur fundamental views remain unchanged, but attention should be paid to periodic market movements from geopolitical tensions and sanctions.
Low Sulfur: Domestic refinery production enthusiasm remains low with ample remaining quotas, making Q4 quota tightness unlikely, potentially eliminating third batch quota needs. After peak power generation season, Kuwait's low sulfur exports are expected to increase. Additionally, Nigeria's RFCC unit maintenance planned for October creates supply-side increment expectations. Demand-side, low sulfur faces substitution from high sulfur and clean energy, expecting weakening low sulfur fundamentals going forward. ARA diesel inventories rose consecutively, returning to median levels. Considering EU bans on Russian oil-processed diesel imports starting January next year, Europe has Q4 restocking needs combined with winter heating demand, keeping European diesel fundamentals tight, supporting low sulfur valuations.