Why the BHP Billiton Limited share price has surged 32%

Credit: Lucas Walters

The share price of mining giant BHP Billiton Limited (ASX: BHP) has continued its incredible rebound today in response to further gains in the iron ore and oil prices during the latest session.

BHP Billiton’s share price slipped to its lowest level in more than a decade roughly seven weeks ago, hitting just $14.06 after starting the year at $17.86. However, in the time since, the shares have regained more than 32% — making it one of the top-performing blue chips in that time – to trade at $18.58.

They’re up 5.2% today alone, while shares of Fortescue Metals Group Limited (ASX: FMG) and BC Iron Limited (ASX: BCI) have rocketed 13.7% and 28% higher, as well.

Like most other companies in the resources sector, BHP Billiton has struggled in recent years as a result of crippling falls in commodity prices – particularly iron ore and oil, which are BHP’s two most important markets.

Although both commodities were trading at multi-year lows between December and January, they have both staged surprising turnarounds, revitalising the hopes of investors in the sector that the commodities rout may have finally found a floor.

Brent oil, for instance, rose another 4.5% during the latest session to US$38.72 a barrel (more than reversing the sharp crash endured at the beginning of the year), while iron ore surged another 5% to US$53.75 a tonne. For the sake of comparison, it traded at its lowest price in roughly seven years in December around the US$38 a tonne mark.

Here’s why I’m still not buying…

As an investor, it can be very difficult to watch a company’s shares soar and simply remain on the sidelines. They want to put their money where they expect to achieve the highest returns, as any reasonable investor should!

Indeed, the resources sector could generate huge gains for investors in the future if the recent spike in commodity prices can be maintained. But while the share prices of resources companies can soar on rising prices, they can also crash upon the first sign of a reversal in prices.

Some investors will disagree with me (and I could be wrong here), but I find it difficult to believe that iron ore prices and oil prices can be maintained at these levels. The world’s biggest producers of both resources are still pumping out more supplies than are needed, which I think will have a negative impact on their prices in the future. Thus, I’m steering clear of the miners as well.

Sure, I could miss out on some gains in the process, but I’m also avoiding the risk of another sharp downturn which could result in significant losses for those investors with large exposure to the sector.

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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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