Why are oil and mining shares plunging?

Why are oil, gas and mining shares suffering so badly in the latest market rout? The oil sector is down 7pc and mining is off 8pc, compared with an overall market only down 2pc.

There are some who say it’s a sign that the commodity boom is ending, as even big companies like BP and Rio Tinto are seeing their share prices fall by a couple of per cent per day. The bears are warning that oil and industrial metals may soon follow equities in a downward spiral, over fears that a shrinking global economy will destroy demand.

Oil and mineral explorers are also on the risky side of the market, so there has been a flight to the safer haven of more defensive stocks.

However, drilling deeper into the depths of the small and mid cap markets, there is a technical trading story of pain for small retail shareholders and the high-risk, high-reward commodity companies they have bet their savings on.

Oil and gas explorers are beloved of the bedroom punter, especially on the AIM market dominated by speculative commodity plays. Gulf Keystone, Rockhopper, EnCore, Nautical have seen some of the biggest plunges by 10pc to 30pc over the last couple of days. Former AIM companies now on the FTSE 250, like Afren and Kenmare Resources, have retained a huge retail shareholder base and also fallen dramatically. Even companies like European Goldfields and Vatukoula Gold have dropped over the two days, despite the price of gold at record highs above $1,600 per ounce.

This is because many private traders relying on leverage have been caught out by margin calls or stop losses – where trades are automatically closed when a share price drops by a certain amount. When hundreds of these are triggered in close succession, it can create a downward spiral in the share price.

Few private investors have the guts to start re-stocking in this kind of environment, so what’s called a buyer’s strike starts to appear.

Undoubtedly private punters often get just as lucky with big wins as well as big losses. But at panicked times like this, when stocks fall out of proportion to all rationality, there are many small shareholders with the same kind of frayed nerves and vanishing savings you’ll find around a black jack table.