Why the BHP Billiton Limited share price is soaring today

Credit: Lucas Walters

Shares of industry giant BHP Billiton Limited (ASX: BHP) have jumped strongly this morning, driving the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to an early rise. The shares were up 4.5% at $17.66, after falling beneath $16 a share as recently as last week.

The reason for the jump appears to be the rallying oil price. Brent oil soared roughly 4% to above US$44 a barrel which was the result of reports that Saudi Arabia and Russia – two of the world’s biggest producers – have forged a deal to freeze oil output. If the reports are true, that could help alleviate some of the pressure on the world’s heavy demand and supply imbalance, reducing some of the production coming into the market.

Meanwhile, the iron ore price rallied 4.6% to US$59.22 a tonne, according to data from The Metal Bulletin. It’s still a long way off its highs from recent years, but also significantly above the low of roughly US$38 a tonne it hit in December last year.

Iron ore and oil are BHP’s two most important commodities, so it comes as no surprise that BHP’s shares are performing so strongly. Similarly, shares of Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) have gained 3.7% each. Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Senex Energy Ltd (ASX: SXY) have all risen more than 3% as well.

Of course, investors will be encouraged by today’s gains, particularly with the rising levels of optimism that the worst may finally be over for the industry. In saying that however, there is still a very real risk that commodity prices will fall again, which could well act as a drag on the share prices of those companies mentioned above.

That’s just a risk that investors should be well aware of before they even consider buying into the industry.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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