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.

What now for gas prices?

The price of UK spot gas between 2007 and 2011

It’s a tale of two perspectives this morning, with results from British Gas owner Centrica and oil major Royal Dutch Shell.

One the one hand, we have Simon Henry, finance director of Shell, saying that: “Gas prices are not particularly high at the moment.”

Meanwhile, British Gas, which made a £518m profit, says the fact that gas is 30pc higher over the last six months forced it into raising customer bills by 20pc. It claims that if it hadn’t hiked up bills, the supply business would have started to make a loss, wiping out most of this year’s profit.

No wonder billpayers are confused. A quick look at this graph of UK natural gas prices gives some context.

The gas price is much higher than it was during the recession, but still not quite as high as it was beforehand – making current record bills hard to stomach for consumers.

And while gas is indeed a lot more expensive than it was last autumn, it has not been going up substantially this year. In fact, the price has been coming down and is lower than when British Gas announced its last 7pc price increase in December.

So where are gas bills going from here? There are two factors here suggesting that the answer is probably ‘up’. Firstly, factor in Ofgem’s conclusion earlier this year that energy companies raise bills more quickly than they lower them when wholesale prices change. Secondly, consider Royal Dutch Shell’s comments about the gas price being “not particularly high”.

This view implies that the experts from the oil companies expect gas to keep on getting more expensive in the medium term – that is, over the decade. That’s why they are pumping billions of dollars into new gas technologies in Qatar and Australia to meet rocketing demand for the commodity in Asia.

However, a lot depends on whether the world’s economic recovery falters. If the European debt crisis gets worse or America stumbles further towards default, it’s possible that prices will head back down again for a while.

Even if the commodity price does come back down temporarily, we’re also going to be hit by the impact of increasing green taxes. I can think of at least four whose impacts are yet to be felt when the bill hits the mat over the next few years.

Any which way, it’s hard to imagine a scenario where average gas bills, now at a record of £665 per year, come down by very much.