Why I think now isn’t the time to buy BHP Billiton Limited or Rio Tinto Limited shares

Credit: Lucas Walters

The BHP Billiton Limited (ASX: BHP) share price is back above the $17 mark today, rising 55 cents or 3.3% to $17.38. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen just 0.7% for the day so far.

BHP Billiton’s shares have had a woeful year, and recently plunged to a fresh 10-year low at just $16.25 as a result of crashing commodity prices and a disaster at one of its mines in Brazil.

However, investors are likely being encouraged today by a 0.8% lift in the iron ore price to US$40.80 a tonne which has also seen the share prices of Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) rise 3.9% and 4.5%, respectively.

Investors are likely also being encouraged by stronger oil prices overnight. While Brent crude oil, which is the global benchmark, actually retreated to its lowest price since 2004 at US$36.04, US crude oil rose more than 1% to US$36.25. As highlighted by The Wall Street Journal, it’s the first time in four years that US oil prices have surpassed the price of Brent crude which some experts consider to be a sign of the beginning of a much-needed recovery.

Oil could drop another 50%

Iron ore and oil prices have fallen sharply over the last 18 months or so and all along the way there have been suggestions from economists that a turnaround is close by. Sometime soon, one of those economists will likely be right, but there is no guarantee that time is now.

Analysts from Goldman Sachs, for instance, think iron ore will trade for just US$35 a tonne in 2017 and 2018, which is well below its current price. As for oil prices, Bloomberg reported this morning that oil speculators are buying options contracts that will only pay out if crude oil prices drop to as low as US$15 in 2016.

Those bets imply oil could fall another 50% or more over the next year, which is possible if production continues to soar and if demand remains weak. Warmer winter temperatures in the US are currently impacting demand for energy, for instance, while slowing growth in China is also hampering demand.

Of course, there is no guarantee that will happen either, but there is every chance commodity prices could fall further from here. BHP Billiton and Rio Tinto are two of the miners best equipped to weather the commodities storm but even they are susceptible to weaker margins and earnings. Despite their low share prices, I’m not a buyer at this stage.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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