UBS Economist Paul Donovan Expects Postwar Oil to Settle Around $80 to $85 a Barrel

Donovan spoke to The National in Abu Dhabi on the eve of the US midterm elections, before Democrats won control of both the House of Representatives and the Senate. Oil had fallen by more than 7 per cent the previous day after the presidents of the US and Iran signalled they were open to a diplomatic solution, the newspaper reported.

"I think we're looking at, as it were, a fundamental fair value for the oil price is probably around $80, $85 a barrel, something like that," Donovan said, adding that this was where prices would probably settle "in a postwar environment". The latest drop had taken some geopolitical risk out of the market, he said, "but what we haven't changed is the fundamentals of supply and demand".

His forecast matters well beyond the energy market. Gulf exporters set their budgets around the crude price, and in Donovan's view the outlook for inflation and interest rates across developed economies depends on it too.

He argued that recent inflation is not persistent, only a run of separate shocks that central banks can do little about. He listed them: post-pandemic supply chain disruption, Russia's invasion of Ukraine, tariffs and now the war in the Middle East. He said the tariff effect is already fading from US data. He sees no wage-price spirals anywhere in the developed world and pointed out that real wages in the United States have been falling.

If oil prices are flat or slightly lower than a year earlier by the second quarter of next year, "you very rapidly get back to a more normal inflation picture", he said. "So it is contingent on the oil price coming down."

The Senate And The Fed

Donovan said that, for monetary policy, the Senate was the result that mattered most, because Federal Reserve governors need its confirmation. With what he called "a great deal of … Democrat anger at the administration", a Democratic Senate could reject President Donald Trump's nominees or drag out the process.

If governors leave and their seats stay empty, the five voting regional Fed presidents gain influence. Donovan said "the regional Fed presidents tend to be somewhat more hawkish than the governors". Even so, he expects little tightening. "So I think rate hikes in '27, if we get any, we maybe get one," he said.

He said American consumers absorbed higher fuel costs by drawing down savings, not by cutting other spending. That leaves them with a thinner cushion against another shock. As long as no new shock arrives, he expects them to keep spending steadily.

The Productivity Pixie

Donovan criticised the new Fed chairman, Kevin Warsh, saying it was "unfortunate that he has chosen to … not communicate clearly". The one thing known about Warsh's thinking, he said, is that "he believes the productivity pixie is gonna magically solve all problems in the future". That is the hope that a surge in productivity will make future economic sums add up.

Donovan does not share that hope. "I do not believe in the productivity pixie, I'm afraid," he said. "I think it is a convenient excuse to make everything in the future add up when actually everything in the future doesn't really add up at the moment."

The first real test of his inflation view comes with oil prices in the second quarter of 2027, when he expects year-on-year comparisons to turn flat or negative if the conflict has ended.