December has been a great month for shareholders of Santos Ltd (ASX: STO). We're not even halfway through the month and the oil and gas producer's shares are already up 15% thanks largely to a surge in oil prices.
At the end of November the Organization of Petroleum Exporting Countries (OPEC) agreed to cut its production down 1.3 million barrels a day to a daily production limit of 32.5 million barrels.
Although there is still a lot of scepticism over whether or not OPEC will stick to the new quota, the agreement still sent WTI and Brent oil prices surging beyond US$50 a barrel.
Prices received another boost overnight after non-OPEC countries including Russia and Mexico also agreed to cut production. The group of non-OPEC producers will aim to cut production by 558,000 barrels from next month according to Bloomberg.
This led to Brent crude oil rising to US$56.09 a barrel and WTI crude climbing to US$53.24 a barrel. A stark contrast to the US$35 a barrel oil was fetching back in January. With Santos' break-even oil price reduced to US$39 per barrel from US$47 per barrel at the start 2016, Santos certainly has the wind in its sails now.
As well as getting a lift from rising oil prices, investors appear to have reacted positively to the company's new three-phase strategy which aims to drive shareholder value.
This includes simplifying the business to focus on five core, long-life natural gas assets. Non-core assets will be repackaged and run separately for value as a standalone business.
The company also aims to push forward with growth opportunities across higher margin conventional assets and maximise production across operated assets.
Finally, Santos intends to develop a focused exploration strategy, and identify additional gas supply to drive long-term value from it five core assets.
All in all, it's not a surprise to see Santos rally this month. It seems as though the stars are aligning for Santos in a similar way that they did for Fortescue Metals Group Limited (ASX: FMG) at the start of this year.
Whilst I think Santos looks great value at current oil prices, I would only recommend an investment in the company if you think prices will remain at these levels moving forward. My fear is that these high prices could encourage U.S. shale producers to restart production. This could offset the OPEC and non-OPEC cut and even add to the current supply glut.