Why there are headwinds in the oil sector

The price of a barrel of oil is a point of reference for investors worldwide, but one advisor believes a shift is taking place in that space.

Matthew Bishop, investment funds advisor at Bishop Wealth Management, admits it’s a commodity he shies away from because of its inherent volatility. Its cyclical nature does not support the consistency in returns he craves, while he also believes that alternative energies are eating into oil’s dominance.

He said: “We used to see when we faced a big recession that alternative energies would kind of fade away because of the cost of them, whereas where we’ve had this recent recession towards oil and gas, the alternative energy space is getting tons of momentum; not only because it’s better for the environment but because companies are finding it more efficient.

“Now the costs are coming down on creating these alternative energies. Those are taking up a bigger space and some of that market share away from that reliance on oil.”

This is far from the death knell of oil, said Bishop, but that, in his opinion, because of market volatility and the growing alternative energy space, there are better options elsewhere.

He said: “If we enter a very bad period and people aren’t spending as much, I would rather own a company that controls our power supply because people are still going to turn on the lights. People are still going to go to the grocery store and buy groceries. These companies have a long runway in terms of finding ways to generate revenue and, at some point, when we do have hard times, cash becomes king.”

He said that with the cost of oil production being high, the cost of labour rising and the dispute over the pipeline heading east, there are significant headwinds.

Bishop finds more appeal in areas that have a layer of consumer reliance and tech companies who possess powerful branding.

He said: “We can still play in the energy space but we might just go for one name that has the consistency, that does oil services or something like that so they have different challenges to find ways to make money. Banks, grocery store chains, which are a layer of consumer staples, would also be areas of interest.

“I think one of the biggest areas that has done well is information technology. Companies like the Googles, Apples … tech is driving our future in a great way.”

He added: “That would be another category that you’d want to have exposure to but if people could spread their money by region, by different categories, then you are playing in all kinds of different areas that maybe don’t offer that same cyclical nature. Move away from things that are commodities would be my best investment advice.”

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