It has been a remarkable 12 months for Santos Ltd (ASX: STO) shareholders. After a couple of years of declines the oil and gas giant came back to life in 2016 and has now gained 43% since this time last year.
With such a strong gain behind it, is now the time to be locking in those gains and moving onto something new?
Ultimately it all depends on your view on oil prices. At present I would say that Santos is priced reasonably fairly all things considered. But the future direction oil prices take will dictate where its share price goes in the future.
If you believe the production cuts that the Organization of the Petroleum Exporting Countries (OPEC) has put in place will drive the oil price higher, then holding onto your Santos shares would be the right thing to do.
The longer oil prices remain higher, the quicker Santos can tackle its massive debt. Just like Fortescue Metals Group Limited (ASX: FMG) has done with rising iron ore prices.
But whilst I don't necessarily expect oil prices to come crashing down, I'm certainly not expecting to see them rocket higher.
I'm reasonably sceptical on OPEC's production cuts and believe that they are unlikely to adhere to them in full.
Furthermore, higher oil prices are likely to encourage idled shale oil producers to restart production in the United States.
In fact, earlier this week the US Energy Information Administration advised that it has forecast for oil production to jump by 110,000 barrels per day (bpd) to 9 million bpd in 2017, rising to 9.3 million bpd in 2018. I expect this will rise further should prices climb higher.
Unless we see a sharp rise in demand for oil, I don't think we'll see the global glut reduced significantly this year or next.
In light of this I think it is unlikely Santos, Beach Energy Ltd (ASX: BPT), Oil Search Limited (ASX: OSH), and Origin Energy Ltd (ASX: ORG) will be able to replicate the strong gains they provided last year.
