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Why Santos Ltd shareholders could be in for a big bonus

Hedge fund managers are “super-bullish” on oil prices and they have never been so convinced that oil prices are set to rise in the near term.  This is according to a report this morning by Reuters which stated that in the most important oil futures and options contracts, hedge funds are holding 14 long positions for every short one.

This comes at a time when OPEC and Russia are cutting oil output in a bid to boost prices higher which prompted US President Donald Trump to tweet that oil prices were “artificially very high” and that “this will not be accepted”.

What now?

If oil prices do surge significantly higher, this will come as good news to shareholders in Santos Ltd (ASX: STO) who are in the middle of a $13.5 billion all cash takeover bid from US suitor Harbour Energy.

The deal is not yet finalised and any material changes in oil prices could change the dynamics of the proposed deal. The AFR reported today that the Foreign Investment Review Board is likely to receive Harbour Energy’s takeover submission for approval this week.

A higher oil price will also be good news for other ASX oil stocks Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Beach Energy Ltd (ASX: BPT).

Foolish Takeaway

Oil & gas, like other commodity-based industries is cyclical and investors will need to form a view on where we are in the cycle prior to investing.

I think there is always a risk of geo-political tensions such as the situation in Syria that could push oil prices higher as well as a rise in global demand although this is somewhat offset by rising US oil shale production. With that said, the stocks above are well worth considering should you be looking within this industry.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

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 Scott Phillips.

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