BHP Billiton Limited surges: Are shares heading higher?

Credit: Lucas Walters

In morning trade the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is higher by around 1%, with mining giant BHP Billiton Limited (ASX: BHP) contributing strongly with an almost 4% gain.

A surge in oil prices is of course the reason for today’s gain in BHP, much to the joy of its shareholders and those of its peers Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL).

At the moment everything seems to be going in favour of BHP Billiton. Coal, copper, iron ore, and now oil have risen strongly in the last few weeks. I have no doubt that if things stay the same way then BHP is in a great position to profit.

But ultimately the direction that these commodity prices take next is unpredictable. Personally, I share the view of Citi which sees the iron ore price falling to US$45 a tonne in 2017 and US$38 a tonne in 2018, as reported in the Fairfax press.

Increases in supply from both Australia and Brazil are likely to put pressure on prices, especially if the strong demand from China is not sustained. If they do drop to the levels above it will not make life easy for the company and profits will no doubt be squeezed.

Then there’s the oil price. Whilst OPEC is a key producer of oil, it isn’t as important to overall production as it was 10 years ago. Since then US shale oil has come onto the scene, making the United States the second-largest oil producer in the world, behind Russia according to CNN.

As long as these two countries keep pumping out oil at the same rate, I don’t believe the proposed cut from 33.2 million barrels a day to between 32.5 million and 33 million barrels a day will have a huge effect on the global glut for some time.

Let’s not forget as well that an increase in oil prices will encourage more idle rigs in the United States to come on line.

So with BHP Billiton’s share price up around 33% in the last six months I certainly wouldn’t buy more of its shares right now. Instead I would look at taking profits because if oil and iron ore prices fall back, there could be a steep drop in its share price.

Instead of risking money in the miners I would recommend investors take a look at these rapidly growing shares instead. Each has growing earnings and dividends, with the potential to bolt higher in the months ahead as well.

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Motley Fool contributor James Mickleboro 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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