In Tuesday's domestic trading session, both the fuel oil and asphalt complexes displayed notable divergence. The LU10-FU11 inter-product spread surged to a record high, while the BU10-FU11 spread also continued its upward trajectory. Geopolitical tensions remained a key undercurrent, with Iran's Supreme National Security Council Secretary announcing plans to declare a "no-go zone" in the Strait of Hormuz area in the coming days.

Focusing on fuel oil, the LU10 contract settled at 5,112 yuan per tonne, marking a 2.34% increase from the prior session, while FU11 closed at 3,880 yuan per tonne, up 0.21%. The price gap between the two contracts on the day reached 1,278 yuan per tonne, expanding from 1,162 yuan per tonne on September 4th. This widening divergence reflects a starkly different fundamental picture for high versus low sulfur fuel oil, with the high sulfur market showing signs of loosening at the margins while low sulfur remains in a tight balance.

For the high sulfur segment, the immediate supply gap persists, but signals of easing are multiplying. The FU front-month spread has retraced significantly, falling to 203 yuan per tonne from 405 yuan per tonne at the end of August. Similarly, Singapore high sulfur cash premiums have softened to $32.78 per tonne, a 4% decline, indicating weaker spot market bidding and a loosening in the physical market. While supply constraints from Russia and the Middle East remain, with Russia extending its export ban on diesel, marine fuel, and gasoil until September 30th, the impact of tight supply is being cushioned by softening demand. South Asian power generation demand is transitioning away from its summer peak, leading to reduced fuel oil imports from Saudi Arabia and India. Furthermore, the seasonal downturn in shipping demand for September and October is limiting bunkering growth, and domestic processing margins for cracking and coking units having retreated from highs, combined with an increase in near-term arrivals, point toward a looser high sulfur balance. Inventory data corroborates this, with Singapore fuel oil stocks rising for four consecutive weeks as outflows decline.

Conversely, the low sulfur market maintains its structurally tight posture, underpinned by robust diesel crack spreads. The LU front-month spread has strengthened to 324 yuan per tonne, up 6% from the end of August. Singapore low sulfur cash premiums have climbed 15% to $38.30 per tonne, while European diesel cracks have surged to $85.58 per barrel, a 15% increase, providing crucial support. This structural support from the diesel complex has driven the high-low sulfur spread wider over the week. Despite a slight pullback at the week's end, the weekly average moved higher. Looking ahead, the focus will be on transit through the Strait of Hormuz and broader geopolitical developments, with the expectation that high sulfur will likely underperform relative to low sulfur. Short-term volatility in a high range is anticipated, and a strategy of selling high sulfur far-month contracts on rallies is suggested.

Turning to asphalt, the BU10 contract settled at 5,112 yuan per tonne, up 2.34%. The BU10-FU11 spread continued to climb, closing at 1,232 yuan per tonne on September 7th, up from 1,144 yuan per tonne on September 4th. Regional spot prices for heavy-duty asphalt are hovering around 5,200 yuan per tonne or higher, with the futures market playing catch-up to spot, resulting in a positive and slightly strengthening basis. The core drivers are dual-tightening on both the supply and cost fronts. Domestic production from 54 sampled enterprises fell to 358,000 tonnes for the week ending September 4th, a five-week low. While sample shipments declined 2.1% to 319,500 tonnes, this reflects reduced refinery availability rather than shrinking demand, with traders reluctant to release inventory into the market. Total inventory across plant and social storage stands at 780,000 tonnes, near the year's low.

Given reduced output from major refineries, improving end-user demand, and strong market buying interest, the outlook for asphalt remains supported. High Brent prices are establishing a solid cost floor, and although elevated prices may temper demand and cause some construction pauses, the traditional "golden September and silver October" peak season expectations remain intact, suggesting underlying demand has yet to be fully realized. The near-term target for the asphalt futures to converge with spot is the 5,200 yuan per tonne level. The BU-FU spread has also spiked significantly higher. Asphalt's low supply elasticity, combined with structural tightness in its raw material inputs, allows for a more robust fundamental response when demand is stimulated. When the fundamentals of BU and FU diverge, the spread tends to widen more substantially. The recommendation is to continue rolling BU-FU spread trades, focusing on buying dips and selling rallies. The asphalt market's reliance on Venezuelan crude remains a deep-seated factor that will require higher costs to substitute going forward.