Optimism Takes A Holiday

Oil was hit with a bout of economic pessimism on Friday despite signs that that pessimism may be misguided. Instead of the U.S. and China stuck in a no-trade deal, we are now getting reports that a deal is imminent. The Wall Street Journal reported that U.S. and China are closing in on a trade deal as both countries could lift some tariffs imposed last year, and Beijing would agree to ease restrictions on American products.

This comes as optimism in U.S. oil production rising may be misplaced. U.S. oil rigs plunged by 10 rigs according to Baker Hughes with more reports of disappointing results at U.S. shale oil wells. This comes as OPEC continues to slash oil output just as U.S. oil supplies will be lower. Venezuelan oil is still sanctioned as it appears that the embattled Maduro is not leaving anytime soon.

Let’s start with U.S. - China trade. The Wall Street Journal reported that China and the U.S. are in the final stages of completing a trade deal, with Beijing offering to lower tariffs and other restrictions on American farm, chemical, auto, and other products and Washington considering removing most, if not all, sanctions levied against Chinese products since last year. The agreement is taking shape following February’s talks in Washington, people briefed on the matter on both sides said. They cautioned that hurdles remain, with each side facing possible resistance at home that the terms are too favorable to the other side.

On Friday, the oil market was all doom and gloom about trade. Some even wondered whether a trade deal would save the Chinese economy. It will. China is introducing a tax cut to stimulate their economy ahead of their big upcoming annual National People’s Congress that gathers tomorrow (March 5). There very well could be even more measures to stimulate the Chinese economy and at the same time stimulate more oil demand in China.

The Energy Information Administration (EIA) continues to rachet up the outlook for U.S. Shale production but massive losses by shale producers as well as underperforming wells may want us to temper that enthusiasm. The Wall Street Journal reports that “Shale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom.” They warn that “Newer wells drilled close to older wells are generally pumping less oil and gas and could hurt output, leading frackers to cut back on the number of sites planned and trim overall production forecasts”

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