After months of fits and starts, the member states of OPEC finally came to an agreement on November 30 to cut production in 2017 by more than 1 million barrels per day.

According to Craig Erlam of Oanda, non-OPEC nations also pledged to cut their production as well, making cuts totaling an additional 558,000 barrels a day on top of the OPEC commitment.

Given these developments, it would appear that the price of gasoline and diesel will be heading higher in the coming months, as the effects of this decision will eventually make their way down the supply chain.

Stored oil may blunt price increases in the early months of 2017

If there is any significant increase in prices at the pump in Q1 of 2017, it will be caused largely by investor speculation.

Although OPEC and their partners will begin to cut production in January, any reduction in shipments will likely not be felt by consumers for the first few months, as oil storage facilities around the world are currently filled to the brim with product.

To illustrate how much of a backlog there is, traders had oil tankers drop anchor off major ports such as Singapore by the dozens during the worst of the oil glut.

This was done in a bid to wait out prices that went as low as $26 per barrel in 2016, as bringing their cargo ashore during that time would have exposed them to huge losses.

With overall oil consumption being low during the winter season (though this may change if it turns out to be particularly cold in places like New England, where oil furnaces are common), it will take a while to burn through the oil that is currently in storage in facilities around the world.

Higher than normal price hikes likely in the spring

Gasoline and diesel prices should begin moving significantly upwards as soon as spring hits. This season's greatly improved weather will lead consumers to go on road trips across America, resulting in an increased demand for gasoline (and by extension, oil).

Known in the energy industry as driving season, this yearly occurrence will put increased pressure on oil storage facilities across the country, eventually leading to a situation where the supply-demand equation will be tilted heavily in the favor of the latter element.

With supply not being replenished nearly as fast as it will be drawn upon, the price of oil will increase significantly through the spring and summer, leading in turn to a sharp rise in the price of gasoline and diesel.

Sustained high oil prices will activate shut-in wells

If the OPEC/non-OPEC production cuts hold up, it is not unreasonable to expect that prices will move north of $60 per barrel at some point during the year.

Should this price level prove to be sustainable, countless producers throughout the United States and Canada will move quickly to reopen oil wells that had been shut-in during the worst of the oil glut.

In particular, there are scores of partially completed wells in the Bakken formation in North Dakota will be rushed to completion if prices rise as expected.

The effect of bringing all of these rigs back into production (many of which will be making use of state-of-the-art enhanced oil recovery techniques) will likely boost the amount of supply in the second half of 2017 and beyond.

Paired together with the slowdown in driving that takes place in the months after August, an expected increase in the amount of available oil should dampen further price hikes at the pump, with a measurable decline being likely in Q4 of 2017.

Will OPEC and non-OPEC members break rank?

While it looks like we will be heading for an increase in the price of gasoline and diesel in 2017, it is not clear whether some the oil producers that are in on this production cut will keep their word as oil prices escalate well above $60 per barrel.

Many member nations have had their government finances battered over the past two years by sharply lower oil revenue, so it will be tempting for many of them to take advantage of any extended rally in oil prices by pumping extra barrels of oil on the sly.

Furthermore, producers such as Nigeria and Libya have been excluded from the reported production cut, as they have been struggling with internal security issues in recent years.

Should their situations improve significantly in 2017, the extra barrels of oil that these nations will put on the market may curtail the expected increase in the price of oil to a significant degree.

References & Sources

OANDA:   Forex & CFD Trading
OPEC:  Global News
RT.com:   Oil Predictions for 2017