Wall Street oil analysts lauded OPEC's agreement to boost production. Crude oil futures dropped 64 cents to close at $26.45 on the day of the announcement, marking the lowest price since early February. Investors responded by driving stock prices higher for integrated and independent oil companies, and for drilling contractors and other oil-service companies. "Crude-oil prices have come off quickly following OPEC's agreement," said Adam Sieminski, who follows the world oil scene for Deutsche Banc Alex. Brown in Baltimore. He indicated that the cartel's decision to increase production quotas by 1.716 million barrels per day probably won't be enough to substantially lower crude and product inventory prices within countries in the Organization for Economic Cooperation and Development, which account for most of the demand of the industrialized world. "However, some bearish elements exist," Sieminski said. Bruce Lanni of CIBC World Markets in New York said that the most interesting news to come out of OPEC's meeting in Vienna was the oil ministers' talk of price bands and automatic supply changes when certain, undisclosed price levels are reached. "It's interesting that OPEC is saying they will more closely follow and regulate oil prices. I think that is key. For investors, that should instill some confidence regarding the fact that oil prices are not going to collapse below $20 a barrel. This is something that we at CIBC have been stating for a long time. The average price is going to be somewhere within the $20- to $25-per-barrel range. That is where you are going to see prices fall out for several years," Lanni said. Gene Gillespie, senior energy analyst with Howard, Weil, Labouisse, Friedrichs Inc. in New Orleans, expects the OPEC agreement to solidify oil prices at around their current level through the summer. "I think OPEC will maintain fairly high compliance for a couple of reasons. One, most of the spare capacity is with countries that have had a pretty good record of high compliance, like Saudi Arabia or Kuwait. Most of the so-called dissidents within OPEC are pretty close to capacity, so I don't think there is a lot of room for cheating," Gillespie said. "It will maintain compliance at about the same percentage that it has during the past several months, in the 80% to 90% range. That is good enough to keep inventories low and supply-demand pretty well balanced." William Randol of Banc of America Securities LLC in New York also sees the OPEC agreement as positive. "We think oil will average somewhere in the mid-$20s per barrel this year; $24 is our official number. It's sort of what we expected," he indicated. "Whether OPEC will maintain its compliance rate is a very key question. I have to tell you that during the past 12 months, I have been rather surprised at how well OPEC did. Having followed this industry for 25 years, I've never seen OPEC compliance like that before. I think that OPEC is driven by cycles of fear and greed. The question is, Will greed take over this year and will they produce too much? I don't know." All the analysts agree that oil fundamentals look strong. "The background for this is fantastic," Lanni said. "The OPEC production increase, we believe, is just the first of many that will start to take place this year. If you look at the global supply-demand fundamentals, there is just not a lot of significant capacity that is out there. In other words, we think we are going to have a tight supply situation." Global oil demand growth is expected to be 2.4% this year, he continued. "If you continue at a clip of about $25 annually, we think the supply situation is going to be very tight. We have a favorable outlook on the oil market. We think, during the next two to three years, that prices will stay above the $20 level, and this going to bode well for the oil companies, the service companies and the independent exploration and production companies." Oil stock prices responded immediately the day of the agreement. Among the majors, Exxon Mobil Corp. rose nearly 2% while BP Amoco Plc rose slightly more than 4%. Independent producer Cabot Oil and Gas Corp.'s shares climbed 4.87%; Devon Energy Corp., 5%; and Newfield Exploration Co., 3.6%. Driller and other oil-service stocks rose an average of nearly 6% upon the news. The Philadelphia Oil Service Index (OSX) added 5.70 to close at 116.55. Baker Hughes Inc. advanced 6.5%; Rowan Cos. Inc. climbed 4.4%; Transocean Sedco Forex rose 10.8%; and Tidewater Inc. climbed 8.9%. Lanni also expected the higher stock prices. "As twisted as it sounds, the production increases coming out of OPEC will in part be a catalyst to move the share prices of the integrated oil companies higher. One of the things that has been holding them back has been the high oil prices." Bill Gilmer, senior economist with the Federal Reserve Bank, agreed that the production increase, along with resulting lower oil prices, will ease any inflation fears and will reduce possible unemployment in trucking or airline industries, which hinges on fuel prices. "But, frankly, I don't think most economists really see that as much of a threat of inflation. The price of oil was roughly at its current level 2.5 years ago or so, and it didn't cause inflation then. The response of the economy has been completely different in the 1990s to oil-price increases than what we saw in the 1970s and early 1980s," Gilmer said. He said that he is puzzled why drilling for oil this year has lagged as much as it has. "If you take Canadian drilling out of the global picture, nothing has happened since last fall in terms of drilling. We've been at about 750 to 760 rigs domestically," Gilmer observed. "For the rest of the world, if you take Canada out of it, drilling is actually down a little since last fall. Global growth conditions are good, the demand for oil is up but there is just a complete unwillingness to take any risks based on what OPEC has done so far." The fate of service stocks hinges upon what happens to drilling, he said. -Paula Dittrick