Shares in hydrocarbon and LNG giant Santos Ltd (ASX: STO) have posted a swift recovery this past month, reversing a 3-month long downtrend in pricing.
At the time of writing, the Santos share price is changing hands at $7.11 each, a 1.3% drop into the red.
Santos shares have been lifting alongside a corresponding lift in oil prices, recently reaching their 3-year high.
Image source: Getty Images
What tailwinds are behind the Santos share price lately?
Undoubtedly, the biggest factors that tend to influence Santos' share price – outside of its earnings or any market sensitive news – is oil and gas pricing in the commodity markets.
Santos is considered a price taker on the commodity markets it sells into, as it is an ASX resource share that produces hydrocarbons like oil and natural gas.
As such its share price can and does fluctuate with volatility in the broader commodity markets, whether it be to the upside or the downside.
Examining oil pricing action over the last month or so, we see it also broke out from late September, around the exact same time Santos shares popped again.
Brent Crude is considered a sort of global benchmark for crude oil, with around 80% of the world's oil being priced of movements in the Brent benchmark.
Spot pricing of Brent Crude oil alongside Brent Crude futures have both ticked higher since 20 September, extending an upward rally that commenced in August, all while gaining 32% in that time.
Meanwhile, the price of natural gas took off for a second rally from 21 September as well, spiking 20% in just two weeks and easily surpassing its 5-year high.
With all of this underlying momentum weighing in, one top broker has chimed in with its opinion, and afforded investors its take on the outlook for the Santos share price.
What are analyst's saying about Santos shares?
Analysts at leading broker Morgan Stanley were pleased with the company's performance this quarter, however, feel more may be needed to drive additional share price returns in the name.
It noted record quarterly sales revenue from Santos, coming in at US$1.14 billion and a 6% jump from the last quarter.
But the broker reckons that Santos might need to either sell or spin-off some of its assets in order for its share price to keep charging higher.
Should the planned merger with Oil Search Ltd (ASX: OSH) get the green light, Morgan Stanley believes this may be a catalyst to fuel some of these divestments.
Despite robust fundamentals and technicals underlying the growth in the commodity markets, the broker is looking "for news on potential divestments at Dorado (targeting a 20%–30% sell down)", alongside another potential divestment in Barossa, "which Santos and JERA continue to progress the sales and purchase agreement with JERA to acquire a 12.5% interest".
Yet, Morgan Stanley reiterates its overweight recommendation on Santos shares, citing strengths in oil and gas markets in its reasoning.
It has a price target of $8.60 on the Santos share price, implying an upside potential of 21% from its current market trading.
Santos share price snapshot
The Santos share price has struggled this year to date, having posted a return of just 13% since January 1, after rallying 15% this month.
However, in the past year, Santos shares have climbed 40% into the green, around double that of the S&P/ASX 200 index (ASX: XJO)'s return in that time.
