Why shares of BHP Billiton Limited are flying today

Shares of BHP Billiton Limited (ASX: BHP) are flying again today, propelled by stronger commodity prices overnight.

The shares have risen 3.2% today to $19.84, but they’re up 7.1% so far this week and 11.1% since the beginning of the year – despite their sharp dip in January which saw them trade as low as $14.06.

Today’s strong gains come after the company’s London-listed shares rocketed higher overnight, with Rio Tinto Limited (ASX: RIO) also recording a strong lift in its own share price. This was partially driven by a leap in the iron ore price, which could be attributed to the weakness in the US dollar ahead of the Federal Reserve’s upcoming decision on interest rates (where the cash rate is now expected to remain on hold, rather than a hike).

Indeed, iron ore is now fetching more than US$51 a tonne, according to data from The Metal Bulletin. The Australian noted that the boost may also have been caused by a decline in steel inventories in China, helping to ease the imbalance between supply and demand that forced the commodity’s price lower in the first place.

Rio Tinto’s local shares have also gained 1.9% today, while Fortescue Metals Group Limited (ASX: FMG) shares are up 3.1%.

Meanwhile, oil prices remain well above the levels they fell to earlier this year. Brent oil, which is the global benchmark, is currently fetching more than US$50 a barrel with the level of price volatility also subsiding over the last month or so.

Iron ore and oil are BHP’s two most important commodities, so it comes with little surprise that its shares are reacting so strongly to a sustained lift in both of their prices.

Of course, that also increases the risk of investors becoming too comfortable holding the shares, as many have done in the past. BHP Billiton was once considered to be one of Australia’s greatest blue-chip shares – particularly with its monstrous, fully franked dividend yield – but those days appear to be a thing of the past considering the various risks facing the industry.

While investors shouldn’t necessarily sell their BHP shares, they certainly need to be mindful of the risks associated with the business and to not become overly exposed to the stock. I don’t hold shares in BHP, and have no intention of buying anytime soon.

After all, they could climb higher from here, but I don’t believe the risk vs. reward trade-off is balanced in my favour at these prices.

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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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