Here’s why resources shares are going nuts

It seems like only a few days ago that resources companies still couldn’t catch a break and their share prices were being pummelled down.

Today’s a different story and several are shooting the lights out.

So what’s the reason for the optimism and confidence now?

Firstly, an agreement between OPEC member Saudi Arabia and non-OPEC oil producer Russia to freeze production levels appears to be signalling that the global oil oversupply situation may ease, with oil prices rising. Brent Crude rocketed up overnight by 8% to US$34.80 a barrel as a result.

Commodities indexes are heading up, and investors appear more willing to throw their funds at riskier assets such as the commodities shares. BHP Billiton Limited (ASX: BHP) shares are 5.5% higher today at $16.86 while Rio Tinto Limited’s (ASX: RIO) share price is up 3.0% at $43.35.

The South32 Ltd (ASX: S32) share price is also up substantially, rising 4.7% to $1.26, capping a remarkable comeback in the past month, rising more than 40%.

Iron ore losers

The iron ore price appears stable (for now) at around US$46 a tonne, which is helping restore confidence in the big miners too. Mining major Glencore soared 16.6% higher overnight, while Anglo American and Antofagasta ended up 17.6% and 8.6% higher, respectively, according to NASDAQ.

Anglo American recently announced that it was giving up on iron ore – unable to compete with the likes of BHP & Rio – although it may take Anglo as long as three years to exit its iron ore assets.

Gindalbie Metals Ltd (ASX: GBG) share price has exploded, climbing more than 21%, while Mineral Resources Limited (ASX: MIN) has seen its share price climb 13.9% to $5.01, after a positive interim result. BC Iron Limited (ASX: BCI) share price is up 10%, while Fortescue Metals Group Limited’s (ASX: FMG) share price has surged 10.4% higher to $2.04.

The one iron ore miner not feeling the love today is Arrium Limited (ASX: ARI) – but it has a multitude of problems, primarily whether it can continue as a going concern. Heading into the close, Arrium share price has collapsed, losing 46% to trade at 2.6 cents. It was something we warned about four years ago.

Foolish takeaway

Unfortunately, the new-found confidence in resources and energy shares is unlikely to last too long. Iron ore supply growth remains strong, while demand from China is weakening as it cuts steel production. The country’s demand for other commodities also appears to be falling as it transitions towards a consumer-driven economy.

We also discussed yesterday why rising oil prices will allow higher-cost producers to remain in production, while others sitting on the sidelines are likely to jump back in, causing oil prices to sink yet again.

Look out below.

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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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