Has the cartel cracked?

Energy analysts and investors have been pondering that question since the Organization of Petroleum Exporting Countries surprised oil markets late Wednesday by making further production cuts dependent on cuts by non-OPEC members, a possibility

outlined on Monday. With Russia and Norway -- the two largest non-OPEC oil producers -- not willing to make meaningful production cuts, further OPEC cuts may not be in the cards.

"This action introduces a substantial amount of doubt into the global oil marketplace as to OPEC's ability to control oil prices," says Marshall Adkins, director of energy research at Raymond James and a member of the

TSC

Energy Roundtable.

It could also mean significantly lower crude oil prices. "The key concern for oil markets is OPEC's lack of resolve in the near term to provide support for falling oil prices," Merrill Lynch analyst Steven Pfeifer told clients Thursday morning. "The outcome of the OPEC meeting indicates the organization's willingness to accept an oil price below $20 a barrel in an effort to force non-OPEC exporters to participate in the next round of output cuts."

Hollow Rhetoric

OPEC may have gotten a little ahead of itself. Last week the cartel was proclaiming victory as Russia indicated it was willing to consider output reductions in concert with OPEC. However, any chance of immediate significant cuts was foiled when Russia agreed to cut only 30,000 barrels per day when pressed by Saudi Arabia.

Though the Russian government says it will talk to OPEC, large Russian oil producers with considerable governmental influence are opposed to any production cuts. "If we are told to cut our production, we will cut," Mikhail Khodorkovsky, a senior official with

Yukos

, Russia's second-largest oil producer, told

Reuters

Wednesday night. "But I will do everything I can to prove it is unreasonable."

The lack of price control from OPEC is becoming clearer to the oil market. In Thursday trading, oil was trading below $18 per barrel, with some analysts suggesting prices could head lower. "We are substantially more bearish near term, with the odds of oil prices in the mid-teens increasing greatly," says Adkins.

Furthermore, additional OPEC production cuts may not be enforced. As

discussed earlier this week, OPEC compliance is running at only 76%, and several OPEC members have been reluctant to even meet current production quotas. Hence, OPEC's continued rhetoric sounds hollow.

With little help from non-member nations, OPEC's clout appears to be slipping. "OPEC has also sent a message of weakness to the crude-oil trading and investment community that could enhance the near-term downside for oil prices," noted Merrill Lynch energy services analyst Kevin Simpson.

Slipping in the Oil Patch

Energy stocks are feeling the pressure from the OPEC news and from a higher-than-expected increase in crude- and heating-oil inventories and a continuing increase in natural gas supplies.

"This should place negative short-term pressure on the stocks," says Adkins. "All that happened with the drop in stock prices Wednesday was the removal of the hype from the past two days about an OPEC production cut."

Merrill's Simpson believes the pullback could be severe. He ratcheted down his intermediate-term ratings from buy to accumulate on energy-services stocks

Schlumberger

(SLB) - Get Report

,

BJ Services

(BJS)

and

Cooper Cameron

(CAM)

.

In trading midday Thursday, Schlumberger was down more than 6%, while BJ Services and Cooper Cameron were both sinking more than 10%. Simpson maintains his long-term buy rating on all three companies, and Merrill Lynch has not provided banking services for any of the companies.

"We expect oil-service stocks to fall over the near term, possibly back below the late-September low of 59 for the oil-services index," he wrote in his report. "The driver is the expected near-term weakness in oil prices from the disastrous OPEC meeting."

However, Simpson's colleague Steven Pfiefer, who covers the integrated oil companies, says the integrated names are already discounting lower oil prices, noting that "integrated oil companies have significantly increased their 'bottom of the cycle' earnings power" through merger cost savings, earnings diversity and significant hedges on future oil prices. He maintains his buy ratings on

BP Amoco

(BP) - Get Report

,

ExxonMobil

(XOM) - Get Report

,

ChevronTexaco

(CVX) - Get Report

and

Phillips Petroleum

(P)

. Merrill Lynch has banking relationships with BP Amoco and Philips. Pfiefer adds that current stock prices assume $19-per-barrel oil.

Though Adkins is clearly in the short-term bearish camp, he thinks the energy service names could overreact, creating a buying opportunity for patient investors. "If the OSX falls below 70, we would be very strong buyers of the group," he says. "In our humble opinion, the group is relatively underowned, and investors should take advantage of any pullbacks."

That may assume the cartel doesn't crumble further.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds' firm was long Phillips, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.