Is the BHP Billiton share price headed back to $20?

Credit: Lucas Walters

BHP Billiton Limited’s (ASX: BHP) share price is up more than 4% in trading today and above $18.

Since January 21, the giant miner’s share price has recovered more than 26%, as both iron ore and oil prices rise.

BHP generates significant revenues and earnings from those two commodities. Iron ore represented a third of the miner’s total revenues and 58% of earnings before interest and tax (EBIT) in the 2015 financial year (FY15). Petroleum (and potash) was 26% of revenues and 15% of EBIT for the same period. Combined, the two commodities account for 59% of revenues and 74% of BHP’s total earnings (EBIT) in FY15.

Iron ore has risen 18% so far this year, after hitting a record low of US$38.30 a tonne on December 11, 2015, and now trades at US$56.09 a tonne.

Brent crude oil has recovered from below US$28 a barrel in January to trade at US$41.50 per barrel. The good news for the oil price, BHP and its shareholders is that the International Energy Agency (IEA) says it is seeing signs of a stabilisation in the oil price – although it does admit that the market is still oversupplied, but the gap is narrowing.

Unfortunately for BHP’s share price, the surge in the iron ore price is most likely due to temporary reasons, with Chinese steel mills stocking up after Chinese New Year, weather-related issues with supply from Australia, news that Vale could lose up to 100 million tonnes of output over environmental licencing issues and temporarily higher steel prices.

The iron ore market still remains heavily oversupplied, with an estimated 100 million tonnes of additional supply coming online in Australia alone. Steel production is also expected to fall, with Chinese domestic consumption falling 5% in 2015 and expected to fall another 5% this year.

Foolish takeaway

If commodity prices can maintain their current levels, or even move higher, then BHP’s share price could easily head back above $20 a share. But at this stage, the pressure on both oil and iron ore prices is more likely to push either or both down.

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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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