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”

The Journal writes in a must-read that “Shale companies’ strategy to supercharge oil and gas production by drilling thousands of new wells more closely together is turning out to be a bust. What’s more, the approach is hurting the performance of older existing wells, threatening the U.S. oil boom and forcing the maturing industry to rethink its future.

To maintain America’s status as an energy powerhouse, shale companies in recent years have touted bunching wells in close proximity, greatly increasing the number of wells drawing on a promising reservoir. The added wells would produce as much as older ones, many drillers believed, allowing them to extract more oil overall while maintaining strong returns from each well. Those rosy forecasts helped fuel investor interest in shale companies, which raised nearly $57 billion from equity and debt financing in 2016, according to Dealogic, even as oil prices dipped below $30 a barrel. That was up from nearly $34 billion five years earlier when oil topped $110 a barrel. Now the results are coming in, and they are disappointing. Newer shale wells drilled close to older wells are generally pumping less oil and gas than the older wells, according to early corporate results. Engineers warn the new wells could produce as much as 50% less in some circumstances. The newer shale wells often interfere with the output of older wells, because blasting too many holes in dense rock formations can damage nearby wells and lower the overall pressure, making it harder for oil to seep out. The moves could potentially cause permanent damage and lower the overall amount recovered from a reservoir.” More to read at WSJ.com.

Do you think OPEC is going to listen to President Trump’s tweets on oil? OPEC’s production dropped to a four-year low in February, the monthly Reuters survey showed on Friday. They showed that the 14 OPEC members pumped 30.68 million barrels per day (bpd) in February, the survey showed on Friday, the lowest OPEC total since 2015, according to Reuters surveys. January’s total of 30.98 million bpd was not revised. In February, the 11 OPEC members bound by the deal achieved 101 percent of pledged cuts, the survey found, up from 70 percent in January. Among exempt producers, Venezuelan supply fell, while Iran managed to boost exports despite also being subject to U.S. sanctions.

Reuters is reporting that Venezuelan opposition leader Juan Guaidó plans to run the risk of arrest by returning home on Monday after he ignored a court-imposed travel ban and toured Latin American allies to boost support for his campaign to oust President Nicolas Maduro. Guaidó’s return, details of which his team have kept under wraps, could become the next flashpoint in his duel with Maduro as he seeks to keep up momentum and spur his international backers to further isolate the socialist government. His arrest could allow the opposition to highlight how the Maduro administration represses political foes and prompt the United States to impose even harsher sanctions. But it could also strip the opposition of a public figurehead who has brought unity after years of infighting. This also means that the return of Venezuelan oil to the U.S. market is not looking good.

We should see another big draw in U.S. Oil supply this week. The Houston Shipping Channel has been shut and demand is exceeding expectations. Look for crude to fall by 3 million bbl, gas by 2.5 million and distillates by 3.5 million. We are seeing U.S. crude imports fall and U.S. crude exports near record highs 

Nat gas rigs were up by 1. Andrew Weissman of EWB analytics says that natural gas jumped sharply last Monday in response to a strongly bullish weekend weather shift—and then spent the rest of the week trading within a very narrow range, with the April contract ending the week just 2.3 cents above Monday’s close. Extreme cold weather early this week may keep natural gas trading near Friday’s close for the first two or three days of the week. With temperatures expected to start to moderate significantly next weekend, however, prices could soften later in the week.