Why the BHP Billiton Limited share price soared 19% last week

Credit: Lucas Walters

The share price of BHP Billiton Limited (ASX: BHP) is dragging on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) again today, reversing some of the gains achieved over the last week.

Indeed, shares of BHP soared an incredible 19.2% during last week, climbing from just $16.18 to $19.28 as at Friday’s close. These gains were driven by a rising iron ore price together with rebounding oil prices following reports that the world’s biggest producers were to forge a deal to freeze oil output.

Unfortunately, the meeting did not result in any production limits being set, which has caused something of a selloff in the oil markets. West Texas Intermediate (WTI) crude is back trading at US$38.48 a barrel, while Brent oil, which is considered the global benchmark, is back at US$41.37.

The latter was trading for more than US$44.50 a barrel mid-last week after rising as much as 4% on Tuesday night. Despite its recent resurgence, it is entirely possible that Brent crude could fall back into the US$30s range in the near-future.

Indeed, iron ore and oil are BHP’s two most important commodities. While it is now widely believed that the worst is over for both markets, there are fears they could still retreat from these levels, which would put more pressure on the resources sector.

That would also explain why shares of companies such as Santos Ltd (ASX: STO) and Senex Energy Ltd (ASX: SXY) have been sold down so heavily today. The pair have fallen 5.5% and 10.3% respectively, while Origin Energy Ltd (ASX: ORG) and Oil Search Limited (ASX: OSH) have both fallen more than 4% as well. BHP’s own shares are down 3% at $18.71.

Of course, shares in the resources sector have been hammered in recent years, and they could very well rebound over the coming years if commodity prices do improve. However, there is certainly a risk that they will fall even further or fail to live up to expectations, which could see these shares underperform.

It’s definitely a risk, and is well worth keeping in mind before you even consider a move into the sector.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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