Market Report Week 35 - 26.08.2025

In the fuel oil market, HSFO (3.5%) is under pressure relative to Brent. The HSFO crack (1M) in Rotterdam has fallen close to USD 6 per barrel or some USD 38 MT since late May. We have also observed VLSFO cracks under pressure, albeit to a much lesser degree. Cracks in Singapore have also fallen.

First, there is a seasonal component to the move. The market is now focusing on the expected weakening of demand in the autumn as Middle East power demand for air conditioning tapers off.  Secondly, we have also seen incipient signs of rising stocks in Rotterdam, where the market has been exceptionally tight. In Singapore, the inventories have been plentiful over the summer, but have dropped recently to an eight-week low, though they remain abundant. Notably, HSFO sales in the port of Singapore rose more than 15% in June compared to May, up 10.3% year-on-year.
 
Thirdly, the rapid move lower in HSFO cracks may have triggered some forced selling. It may have been a consensus trade to be long the HSFO crack over the summer, given the strong fundamentals and the backwardated curve, which makes it cheap to position for a less negative crack. Finally, the global impact from the US tariffs may have created market concerns that bunker demand will be weaker in the autumn.  All in all, the move lower in HSFO cracks may have a final leg. But considering that inventories in Singapore are now at an eight-month high, ARA inventories remain low, and the global economy is still growing, we may be approaching an attractive price level when we consider flat prices. For buyers in EUR (DKK, NOK, SEK, GBP) the weakening of the US dollar makes the flat price level even more attractive.

In recent months, we have seen the EUA spot price decouple from the gas price. TTF gas has been under pressure, particularly during August, while the EUA price has remained stable at around EUR 70/MT.  This is somewhat surprising given that storage injections have supported gas prices, whereas EUA demand is usually modest in summer when consumption of gas and coal is lower. There is more solar power in the grid during the summer, and there is no demand for heating. However, jet fuel consumption has been higher, and shipping has also shown growth in recent months ahead of the new US tariffs. The stronger EUA market may also reflect that some buyers have not yet covered their obligations before EUAs for 2024 emissions must be surrendered at the end of September. It could also signal that the EUA market is now trading with a close correlation to the DAX index, with the price reflecting expectations of higher industrial demand, not least from the defence industry.

It is also possible that the market is now beginning to focus in earnest on the likelihood that the market balance will tighten in 2026 and 2027. In contrast to 2024 and 2025, when the market has been broadly balanced, there is a prospect of a significant tightening over the next two years, with demand exceeding supply. This may explain why, over the past month, we have seen speculators increase their net long position in EUAs. The chart below shows our expectations for supply and demand through to 2030. It indicates that there will be a shortage of EUAs in the market, particularly in 2026 and 2027.  This means that the market "surplus" will fall markedly over the next two years. The EUA market is characterised by being a financial market. This means that, unlike physical commodity markets, an expected change in the future market balance affects the spot price.
If everyone in the market agrees that the market will tighten in the future and the price will rise, then the price will increase today. Otherwise, arbitrage would occur. In practice, there is, of course, no complete agreement on the market balance. There may also be liquidity-related reasons why the market does not rise today, even if there is agreement that the price should increase in the future.