FreightWaves oil report: Valero’s conference call had little good news on the impact of IMO 2020

The scenarios laid out by Valero officials on their third-quarter earnings call painted a picture of a market that already has begun to make moves linked to IMO 2020.

Diesel spreads relative to benchmarks like dated Brent crude have been wider over the past several weeks. Gary Simmons, the senior vice president of supply, international operations and systems optimization for Valero, the largest independent refiner in the U.S., said IMO 2020 almost certainly has a role in that movement. 

“It’s pretty difficult to be able to determine how much the strength… is IMO- related and how much is just fundamentals and supply,” Simmons said on a conference call with analysts following the release of Valero’s third-quarter earnings. “But we’re certainly seeing a lot of indications in the market of IMO starting to impact it. The things I would point to, the diesel curve is just continu[ing] to shift higher the closer we get to the January 2020 date.” (The transcript of the call was provided by SeekingAlpha).

A simple crack spread of front month CME Brent vs. CME ultra-low-sulfur diesel (ULSD) averaged $16.44/barrel in the first six months of the year. Since October 1, it has averaged $21.66/b and has been above $22 several times. 


IMO 2020 is a rule to be implemented by the United Nations’ International Maritime Organization. It mandates that the marine fuels that power ships have no more than 0.5% sulfur, down significantly from the current rule of 3.5% sulfur. 

Two diesel-based solutions –marine gasoil (MGO), which is an existing product, or a new product called very-low-sulfur fuel oil (VLSFO) – are expected to be the key solutions to the displacement created by pushing high-sulfur fuel oil (HSFO) out of the marine fuel pool. 

It was what Simmons said about the new blends of VLSFO that may have been the most significant remarks of the conference call. Bottom line – at this point, VLSFO might not be ready for prime time. 

Valero is supplying VLSFO in the Corpus Christi market, where it has a refinery. It’s also undertaking a project in Pembroke, Wales, to do the same. This is a company that clearly believes in a role for VLSFO.


“But we have also seen that there [are] a lot of challenges being able to blend this 0.5% material,” Simmons said, specifically citing making VLSFO from crudes that are high in a waxy product called paraffinics.

As a result of that, Simmons said, “I think there is a good chance that initially ships will run marine gasoil and then gradually transition to the lower sulfur bunker material.”

This is not good news for the trucking and transport industry that buys diesel. VLSFO is a competitor with ULSD and gasoline for an unfinished intermediate product known as vacuum gasoil (VGO). VGO can be put into a unit known as a cat cracker to make gasoline or into a unit known as a hydrotreater to make ULSD or MGO. What had been two uses for VGO has now gone to three. 

However, if the demand for IMO 2020-compliant fuels shifts more toward MGO and away from VLSFO, that is a more diesel-intensive application. More diesel molecules are needed for MGO than VLSFO. 

The scenario Simmons laid out, with a known reliable product like MGO being favored over recently created VLSFO, is not new; it’s been predicted for awhile. 

And if it happens, it isn’t a good thing for those who need to buy diesel. The Simmons forecast of that development is coming from a high-ranking official at the biggest independent refiner in the country, with all the knowledge and perspective that comes with that. 

Lane Riggs, the company’s executive vice president and chief operating officer, said he didn’t expect the situation spelled out by Simmons to ease soon. “It could go on for quite some time depending on the technical difficulty of making those fuels,” Riggs said. “It is not an easy task… to make all the fuels work from a compatibility perspective.”

Even as Simmons talked about technology and chemistry, he also talked economics. He said price incentives were starting to encourage refiners to take VGO and use it to produce VLSFO rather than put it in a unit known as a cat cracker to make gasoline. (One interesting aspect of these discussions is that when diversion of VGO is discussed, it always seems to be portrayed as VLSFO vs. gasoline. The ability to put VGO into a hydrotreater to make diesel is rarely discussed. But it is very much a choice, and diversion away from cat crackers and into VLSFO blending could also mean diversion away from hydrotreaters for making diesel.)


“If you look today, low-sulfur VGO is $5 over gasoline in the Gulf, which is to the point where you’ll start to see people pull that out of cat crackers and put it into low-sulfur bunkers, which should impact gasoline yield moving forward,” Simmons said. 

(The Energy Information Administration does report data on inputs into cat crackers and hydrotreaters. It is not yet showing the trend that Simmons referred to.)

Simmons expressed pessimism that there would be a big installation of scrubbers that would allow HSFO to continue to be used as a marine fuel. 

Every scrubber installed is effectively a friend to truckers. Scrubbers remove the sulfur from emissions before they go up the stack, so the fuel essentially is compliant and a ship would not need to turn to MGO or VLSFO.

While scrubbers are being installed, Simmons didn’t see a surge. “It appears there are a lot of technical issues around the scrubbers that maybe they don’t come on as fast as what we thought,” he said.

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