By S.R. Nunnally

Oil's significant two-day drop has taken prices to lows not seen since before Hurricanes Katrina and Rita ravaged the Gulf Coast.

Let's examine why this happened, and determine what effect it will have on oil producers like Exxon Mobil (XOM:NYSE) and oil service providers like those I've highlighted this week.

In an update to a report of yesterday's drop, MarketWatch.com quotes analyst Jon Rigby from UBS:

“Currently, the move appears trading and technical related rather than a response to any new fundamental data. Note, though, that since Sept. 20, sharp gains and losses have tended to be corrected within days - even the out-of-range moves around the November expiry - which suggests there has been no conviction behind a move either way yet.”

That makes sense when you look out and the prices for March 2007 crude oil futures. Their price is still above $60 a barrel, and has not fallen as quickly as the front month futures.

Because today is expiration day, the front month futures are for December. This morning, they fell by approximately 66 cents while March 2007 futures fell by only 27 cents.

The smaller price move in the March futures leads me to believe this dip could be short-lived, and indeed be due to volatility close to expiration rather than a significant change in trend.

For oil bulls, that's a good sign.

It's also a good sign for oil producers. If this dip can be reversed rather quickly… say by the end of the year… then companies like Exxon Mobil will barely feel the pinch.

Let's not forget, “low” is still a relative term with oil prices between $55-60 a barrel.

Exxon might not see a record-breaking fourth quarter, but it certainly won't be filing for Chapter 11.

That, in turn, is an equally good sign for oil services. If oil producers can still make decent profits, then oil services are in business. Additionally, oil services are pretty flush right now with oil producers bringing in record profits and spending them on further exploration.

My favorite contract driller, Transocean, Inc. (RIG:NYSE) had a backlog of $94 million at last quarters earnings release.

Those kinds of numbers will really help oil service companies weather drops in oil prices well… perhaps even better than oil exploration companies.

In all there are still plenty of reasons to be bullish on the oil industry. I for one remain an oil bull, and think the best area to be with in this industry is in oil service companies. Material Profits subscribers, keep an eye out for this topic in next month's issue!

That's all for the week. Enjoy the weekend.