We, at FxWirePro, have said several times in the past that the cost of production for the swing producers (shale oil drillers; since it is relatively low-cost affair for them to shut down and restart production) would be one of the key determinants of the future oil price. As long as the price curve is above the cost curve, the shale oil producers would continue to operate at maximum capacity feasible unless there is a de-facto oligopoly agreement among global producers to limit production, similar to the recent production freeze deal among the OPEC members.

When oil price started to crash in 2014 and continued to crash through 2015, the focus turned on the shale oil producers as they were expected to suffer the most. And they did suffer. During 2014 November, 1,578 oil rigs were operating in the United States and by May 2016, that number crashed to just 318, almost an 80 percent drop. There were numerous bankruptcies in the United States since 2015 in the energy space. Throughout this turbulent time, OPEC, biggest oil supplying cartel in the world not only maintained high levels of production but increased it.

Now, the latest news would tell you that Saudi Arabia and the others in OPEC, who were more interested in wiping out high-cost producers such as shale drillers in the United States have chosen to strike a production freeze deal that could see a cut around a million barrels. Does this mean that the strategy of wiping out succeeded? Does it mean that the battle is won? Or is it just hopeless retreat?

Well, the strategy has partially worked. It was successful in slowing down the advance of shale drilling. But killed it? By far no. US oil production dropped by just a million barrel or a little more than 10 percent, which indicates that producers have become more efficient and cost effective. Numbers of operating rigs in the United States are down a lot but since the numbers bottomed in May, they are up by more than 35 percent. In addition to that, Britain recently approved shale oil drilling.

So, the moral is without a global oligopoly agreement, swing producers would continue to remain a key determinant of the future oil price.