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Why the Santos Ltd share price is surging higher

Credit: rabiem22

Santos Ltd’s (ASX: STO) share price has continued to climb today, adding another 4.8% to trade at $3.08. Although it is still well below the $3.72 price tag it begun the year at, it has certainly improved its position since falling to a low of $2.46 recently.

With a market value of more than $5 billion, Santos is one of Australia’s largest energy producers. Unfortunately, its sheer size hasn’t protected it from the strong headwinds facing the sector as a whole with the oil price experiencing what has been one of its most violent crashes in history.

Since mid-2014, the resource’s price has retreated more than 70%, falling from around US$110 a barrel to a 13-year low of US$27 earlier this month as a result of a severe oversupply in the global market.

However, speculation that OPEC and non-OPEC producers may be close to reaching an agreement to cut production has helped to lift prices. Ironically, oil is now in an official bull market (defined as a 20% rise) with prices around US$34 a barrel.

Despite raising billions of dollars in cash over the last year to help bolster its balance sheet, it still has plenty of debt. Lower oil prices make it more difficult for Santos to service these obligations, so there’s little wonder why investors are pleased to see the resource’s price strengthen.

However, Santos isn’t the only energy company the market is cheering higher today. Shares of Woodside Petroleum Limited (ASX: WPL) have also risen 3.9%, Origin Energy Ltd (ASX: ORG) is up 4.9%, while Senex Energy Ltd (ASX: SXY) and Sundance Energy Australia Ltd (ASX: SEA) have also gained 4.8% and 9.1%, respectively.

Although oil prices have risen recently, the sector is by no means out of danger yet. Oil prices could easily tumble further if production does continue to rise, while the inability for OPEC and non-OPEC producers to reach an agreement could also spell trouble. Personally, I think the risk-reward trade-off still remains unattractive, especially when compared to some of the other opportunities on the ASX.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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