Why the Santos Ltd share price has soared 64%

The share price of Santos Ltd (ASX: STO) caused many heartaches at the beginning of the year, but conditions have improved considerably for shareholders of the energy producing giant in recent weeks.

Indeed, Santos was one of the many victims in the energy sector to fall sharply as a result of crashing oil prices at the beginning of the year. Oil fell to its lowest level in nearly 13 years, which caused Santos’ own share price to crash to a multi-decade low of just $2.46 (down from almost $8 a share in May 2015).

However, oil prices have since rebounded strongly, more than reversing the crash from earlier in the year. After sinking to around US$26 a barrel in February, US crude oil is now fetching almost US$36 a barrel (up 3.9% during the latest session), while Brent crude, which is considered the global benchmark, has also rebounded to more than US$39 a barrel.

Santos’ share price has been a direct beneficiary. The shares have soared as much as 64.6% since bottoming out in January to trade at $4.05, and have gained 3.8% today.

Of course, oil prices remain well below their levels from mid-2014, when one barrel was fetching almost US$110. Thus, conditions remain difficult for Santos and other energy producers such as Woodside Petroleum Limited (ASX: WPL), Senex Energy Ltd (ASX: SXY) and Oil Search Limited (ASX: OSH), but they have certainly improved in recent weeks.

While that may be the case, a word of caution is necessary. While share prices of the energy producers may soar when oil prices rebound, they can also plunge when oil prices fall, as we saw earlier this year.

Whether you buy shares in companies such as Santos today should really depend on your view as to whether the gains in the oil price can be sustained, or if you think the oil price will retreat again in the future. One way or another, investors shouldn’t become overly exposed to the sector in case further falls do eventuate.

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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. You can follow Ryan on Twitter @ASXvalueinvest.

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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