The real elephant in the room is how will the world handle the new IMO 2020 sulphur regulation? This is going to drive the dynamics of the oil markets for the next 18 months — so being able to navigate that is going to be paramount to survival and profitability.

One among many questions — how will marine gasoil and heavy fuel oil fare? — will by itself keep many analysts awake. Every party — be it shippers, refiners, operators, etc — thinks the other is taking care of the problem, but the reality is there has been no agreement around the table yet.

There is a lack of clarity on how to respond. The market needs certainty. We missed the wave of investing in putting scrubbers on ships.

Now it comes down to refiners, port authorities and blenders to give clarity on the enforcement and the requirements in different areas. Some players are already providing alternatives to destroying high sulphur fuel oil and to changing refinery slates as soon as everything is defined clearly.

The industry can react when the conditions are there, but the message must be coherent on how to, for example, extract waivers, equal standards between ports, and so on.

For example, answering this question is crucial: What will be done with the surplus heavy fuel oil as more developing economies go into gas?

Responsiveness and flexibility will be key to any operator. The ability to manipulate a barrel quickly — to blend it, upgrade it, convert it — is paramount during this backwardation period. Terminal and port operators must show a huge degree of flexibility to incentivise that barrel to come onshore and enable that incremental refining margin to be achieved.

They must realise that their assets will be challenged more in this environment than when the market is in a natural contango.

But perhaps the more challenging question is whether terminal operators should build clean or dirty storage tanks. The answer depends on your point of view regarding where fuel oil is going to go when the International Maritime Organisation’s 2020 ruling that all sulphur limits in bunker fuel must be 0.5 per cent, instead of 3.5 per cent comes into play.

Are fuel oil inventories going to balloon due to insufficient coking capacity? And will fuel oil have a role in the bunker pool?

If the IMO regulations are effective in the bunker market, then we will need an alternative to high sulphur fuel oil — and that will be gasoil. In this scenario, marine gasoil will have to rise to help meet latent 2020 demand. Fuel oil will also rise due to lack of natural demand from the market.

There will be an inflection point and the storage requirement will have to change as a result. This will play out over the next 12 months.

One thing is clear though: tolerance for not abiding by the IMO’s ruling will be very low by the likes of the UN’s International Convention for the Prevention of Pollution from Ships and other authorities. The turnaround for IMO has become acute with talk of drones and satellite enforcement.

Fines for non-compliance may not be very high, but reputational damage will be.

Sean Evers is managing partner at Gulf Intelligence.