Why the BHP Billiton Limited share price exploded today

Credit: Lucas Walters

The share price of global mining giant BHP Billiton Limited (ASX: BHP) has exploded this morning, soaring 7.4% to $15.25. It hit a high of $15.34 earlier in the session after the miner’s London-listed shares surged more than 10% overnight.

Indeed, BHP’s shares have come under enormous pressure so far in 2016 as a result of concerns regarding China’s future growth, as well as further sharp falls in key commodity prices. Iron ore is trading around US$41 a tonne but tipped to fall to around US$35 this year, while oil prices also bottomed out around US$27 a barrel yesterday – their lowest price levels in 12 years.

However, the market seemingly turned a corner overnight as optimism spread through global equity markets. Oil prices posted their biggest daily gain of the year with US crude oil briefly hitting the US$30 a barrel mark, while Brent crude oil has also rebounded to US$29.58. The sudden surge can likely be attributed to new data which showed stockpiles of the resource were still increasing, although investors had been fearing an even worse result.

Together with iron ore, petroleum is one of BHP Billiton’s most important commodities, the pair accounting for a large portion of the miner’s overall earnings. Even at its current price BHP is still making a profit, albeit at much thinner margins than it has enjoyed in the past.

Fortescue Metals Group Limited (ASX: FMG) shareholders are also enjoying strong gains today, their shares up 7.6%, while Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) have also risen 7% and 4.9%, respectively.

Is it time to buy?

Indeed, BHP Billiton shareholders have endured a horror run, extending way back to 2011 when their shares peaked around $45. They have since fallen sharply and hit a new decade-low price of just $14.06 during yesterday’s session. As such, many investors will likely be tempted to buy BHP’s shares around this price.

However, investors should note that although the oil price bounced overnight, it is not guaranteed to continue rising over the next few years. The fact is global production continues to rise at a much quicker pace than demand, which some experts within the industry suggest could cause the resource’s price to fall as low as US$10 a barrel. Of course, that’s not guaranteed to happen either, but it is a possibility.

At the same time, China’s economic growth has slowed to its weakest pace in 25 years, and will likely continue to slow over the coming periods. China is BHP’s key customer so that certainly doesn’t bode well for BHP’s growth prospects in the medium-term, at least.

Although today’s bounce is certainly good for investors who have watched the shares crash in recent weeks, I certainly don’t see it as a reason to buy. I believe there are plenty of greater opportunities in the market that investors should look to take advantage of first.

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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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