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Time to sell your energy and resources shares

It was an investor’s worst nightmare overnight, with iron ore plunging 2.6%, US oil prices sinking 4% to below US$40 a barrel, copper down 1.6%, zinc losing 1.7% and gold down 1.4% to US$1,054 an ounce.

Well, a nightmare if you own energy and resources shares that is.

As you might expect, resources companies on the ASX have seen their share prices punished in early morning trade, with the four largest decliners in the Top 20 stocks being Origin Energy Limited (ASX: ORG), South32 Ltd (ASX: S32), Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP).

We’ve already written about iron ore prices falling here, and oil prices appear to be in lock step with the commodity. There’s a simple reason or that. Both commodities are facing large global oversupply issues that may take many years to work through the system.

The other issue is that China’s growth is slowing and as a major global commodity consumer, demand for raw material is sliding.

Brazil and Canada – two of the world’s largest commodity exporters are already facing a recession. Brazil has been negatively affected by iron ore and oil export income falling. The economy has declined for 12 consecutive months – the longest and deepest recession the country has seen in 25 years.

Canada, as a major oil exporter, has seen prices for its oil slashed by half and creating uncertainty over the country’s oil sands projects, which generally have higher production and start-up costs. A number of junior oil sands producers have already suspended operations according to the Wall Street Journal. Canada is expected to cut interest rates to 0% eventually.

The problem for investors in ASX-listed energy and resources companies is that earnings will tumble and share prices will likely follow. And despite some analysts and economists predicting a recovery within the next few years, that appears more hope than a realistic expectation.

Commodity prices could stay low for many years.

When the iron ore price started falling below US$100 a tonne, the miners were confidently predicting that higher cost producing mines would be forced to close, reducing supply and restoring the equilibrium.

In reality, some mines did close, but others, particularly Chinese mines supported by steel mills and the government, continue to stay in business pumping out millions of tonnes of iron ore. The lesson being as John Maynard Keynes reportedly said, “markets can remain irrational longer than you can remain solvent.

Foolish takeaway

Investors may be sitting on small or large losses from their energy and resources shares, but it always pays to remember that share prices can still fall 100% from their current levels. Do you want to risk the rest of your capital?

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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