Pretty much sexual intercourse with clothes on. Occurs a lot in small public gatherings where two people show interest but are disinclined to actually take it further. So to make up for it they cuddle closely, even straddling each other slightly, thus the "fucking" part of the word.
Wow, those two are definitely cuddlefucking in that seat
Bob and Steph are cuddlefucking on that seat, you might not want to sit close to them.