Following a brief rally, shares of BHP Billiton Limited (ASX: BHP) are once again acting as a drag on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) after oil prices plunged overnight.
The miner's shares traded for as little as $14.17 on Wednesday last week, but rebounded as much as 16% to a high of $16.44 on Monday. However, they have since fallen back towards their multi-year low levels and are down 4.4% today at $15.35.
The cause of today's sell-off can likely be attributed to the sharp fall in oil prices overnight. Brent crude oil was down 7.1% to US$30.51 a barrel – after recently trading for around US$36 – while West Texas Intermediate (WTI) crude slipped to around US$28 a barrel. It's down about 20% so far in 2016 in what has been one of its sharpest falls in history.
Together with iron ore, petroleum is one of BHP's most important commodities. Based on the heavy falls suffered, the miner was recently forced to take a $10.3 billion write-down on its Onshore US assets, whilst also reducing the number of operating rigs in the business from seven to five.
So, what's causing the rout?
The resource's price is being squeezed by growing production from the world's biggest producers, combined with waning global demand. As reported by CNBC, crude inventories rose by another 2.4 million barrels in the week to 5 February 2016, to a total of 503.4 million barrels. It seems that the fear is that those stockpiles will continue to grow, and that global demand will not increase quickly enough to ease the pressure.
Like others in the industry, BHP relies on higher oil prices to boost its revenues and cash flows, as well as its overall earnings potential. Another poor earnings result is expected from the Big Australian when it reports on 23 February, which could see the shares fall even further.
Although BHP's shares are already hovering around their lowest level in more than a decade, conditions in the sector are not expected to recover anytime soon. Some forecasts suggest oil could fall towards US$20 a barrel before it begins a recovery, while iron ore could also retreat putting even more pressure on BHP.
As such, I'm not in the market for BHP's shares just yet and think there are far better opportunities to pursue instead.
