Weekly Futures Focus: Geopolitical risks dominate the market, and fuel oil futures experience extreme volatility beyond investor expectations

Ask AI · How do Middle East tensions filter through the crude oil market to fuel oil prices?

Each Daily (The Economic Daily) reporter: Wu Yongjiu Ke Li Editor: Yan Fengfeng

Over the past week, some domestic commodity futures varieties have seen violent fluctuations amid complex geopolitical games, among which fuel oil futures—highly linked to crude oil—have been particularly volatile. The Boshi (BoYi) Master market data software shows that the fuel oil front-month contract on the Dalian Commodity Exchange jumped more than 6% at the start of last Monday to then plunge more than 11% by last Wednesday; the rapid changes in futures pricing have caught many investors off guard.

At the beginning of last week, driven by the Middle East’s tense situation, market sentiment turned bullish and long positions surged. On March 30 (last Monday), the Dalian Commodity Exchange fuel oil futures front-month contract closed up 4.05%, to 4,619 yuan per ton, with a peak intraday level of 4,730 yuan per ton. On the same day, the low-sulfur fuel oil futures front-month contract also closed higher by 3.44%.

However, the rally couldn’t be sustained. On March 31 (last Tuesday), fuel oil futures reversed downward, and the front-month contract closed down 3.79%. The real “storm” hit on April 1: the fuel oil front-month contract saw a rapid selloff intraday and ultimately closed down 11.17%, with an astonishing single-day decline. Yet some recovery occurred on April 2 and April 3, with the fuel oil front-month contract showing partial rebounds. In just one week, investors experienced a full cycle—from euphoric chasing of gains to panicked liquidation.

The core drivers behind the fierce fluctuations in the fuel oil market this round come from the upstream crude oil market and the fast-changing Middle East situation. Fuel oil is a byproduct of petroleum refining, and its price shows a strong positive correlation with crude oil. Last week, international oil prices themselves were already trading in wide ranges amid disruptions from geopolitical developments.

On the supply side, the global oil choke point, the Strait of Hormuz, affects roughly 20% of the world’s crude oil and more than 35% of the supply of seaborne high-sulfur fuel oil. Oil pipelines in Saudi Arabia and the UAE operated at full capacity; on average, they could only replace about 6.5 million barrels per day of shipping capacity, far below the Strait’s normal daily throughput of 20 million barrels. The supply gap is significant.

On the sentiment side, the Middle East situation dominated the market, and sentiment shifted quickly. Expectations of fierce, intense clashes over a short period directly drove large fluctuations in crude oil prices and downstream energy-and-chemical products.

Given such a volatile market, futures institutions generally believe that geopolitical developments have become the absolute core logic for trading in the current energy-and-chemical sector, and high volatility will likely be the short-term norm.

Cofco Futures’ research and analysis holds that crude oil remains the key logic driving the market. The market broadly expects that, in the short term, the Strait of Hormuz will be difficult to restore fully, which will support crude oil prices staying at high levels. However, if oil prices move further upward, suppression expectations stemming from U.S. policy will also likely intensify, and oil prices will most likely enter a pattern of wide-range range-bound trading.

From the evolution of geopolitical developments, there is considerable wavering and uncertainty at the U.S. policy level, making the market more prone to a “run ahead early, followed by correction” pattern. While the relevant conflicts have not truly ended yet, the market has entered a “period of expectation contraction.” Reflected on the board, in the short term, energy-and-chemical products are more suitable to be viewed structurally as “strong nearby contracts and weak further-out contracts.” On one hand, supply disruptions on the ground are still ongoing, so near-month contracts have support. On the other hand, upside space for oil prices is limited, and pressure on far-month contracts will be more pronounced. Therefore, overall recommendations for energy-and-chemical products should remain cautious, and investors should not blindly chase higher prices.

RuiDa Futures’ analysis believes that the fuel oil market shows a scenario of both supply and demand decreasing, but on the cost side, prices mainly follow crude oil fluctuations. Because the expected impact of the Middle East conflict on the supply of high-sulfur fuel is greater than that on low-sulfur fuel oil, high-sulfur fuel oil experiences more dramatic volatility. The firm expects fuel oil prices to mainly fluctuate within a wide trading range.

Nanhua Futures points out that the market needs to focus on tracking the Middle East situation, arbitrage and cargo flows, and changes in regional inventories. In the short term, geopolitical disruptions remain the core driver. Against the backdrop that supply tightness is hard to resolve quickly, the futures board will repeatedly swing due to statements from different parties, but support on the downside is relatively solid.

Disclaimer: The contents and data in this article are for reference only and do not constitute investment advice. Please verify before using them. If you act on this information, you bear the risks yourself.

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