The share price of BHP Billiton Limited (ASX: BHP) has come under intense selling pressure today, reversing much of the gains achieved by the group's shares in recent weeks. The shares were selling 7.3% lower at $16.35 at the time of writing, compared to a 1.8% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Indeed, BHP's share price has risen strongly in recent weeks with investors even piling into the shares yesterday after it reported a US$5.67 billion loss for the first-half of financial year 2016 and cut its interim dividend by almost 75%. It hit a seven-week high of $17.85 during yesterday's session, up 27% from a recent decade-low of $14.06.
The rising iron ore price has played a big role in that rally, as has the surging oil price. Oil suffered a violent start to the year, falling to a near 13-year low around US$27 a barrel, but quickly regained its composure on speculation that the world's biggest producers were close to reaching an agreement to freeze output.
Unfortunately, it seems that such an agreement has not come to fruition. As reported by The Australian Financial Review this morning, Saudi Arabia will not cut its production based on the unlikelihood of other countries assisting in restraining global output.
This isn't good for oil prices which fell heavily overnight. One barrel of Brent crude oil is now fetching US$33 – down from a recent high around US$36 – while West Texas Intermediate (WTI) crude is worth US$31.43 a barrel.
Together with iron ore, petroleum is one of BHP's most important commodities. Its waning price is one of the primary reasons behind BHP's fall from grace over the last 12 months, while it was also part of the rationale behind the group's decision to scrap its progressive dividend policy yesterday. While the shares have risen strongly in recent weeks, that trend could certainly be reversed if oil prices do continue to fall.
Notably, the share prices of Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) have also fallen 4.5% and 2.2% today, while Oil Search Limited (ASX: OSH) shares are down 4.5%.
Although it may seem tempting to buy into resources shares when commodity prices are rising, investors need to consider whether the move will be temporary or permanent. At this point, it appears that both iron ore and oil prices could come under further selling pressure over the coming months, which is a sign that investors should steer clear of the sector, for now at least.
