Oil could fall to $80-$85 after war, while Kevin Warsh believes in pixies, UBS economist says

The week started dramatically as oil prices plummeted by over 7% after US and Iranian leaders suggested a diplomatic resolution to their conflict, and Democrats gained control of both the House of Representatives and the Senate in the US midterm elections. Paul Donovan, chief economist at UBS Global Wealth Management, spoke about the potential fall of oil prices to around $80-$85 a barrel once the conflict ends.

He believes that the fundamental fair value for the oil price is around this range in a postwar environment, as it settles the geopolitical risks. However, the bigger risk lies with the Federal Reserve, as the Senate's confirmation of Fed governors could affect monetary policy decisions. Donovan thinks that rate hikes in 2027 might only happen once, if at all, due to the temporary nature of the current inflation issues.

These challenges include post-pandemic supply chain disruptions, Russia's invasion of Ukraine, and the US-China trade war. The tariff effect is already fading from the US figures, and oil prices might follow. Donovan also mentions that the American consumer has been stoic rather than hedonistic during the higher oil prices, cutting back on savings instead.

However, this cushion may be thinner now, making consumers less ready for another shock. Donovan is critical of the new Fed chairman, Kevin Warsh, who believes that productivity will magically solve future problems. Donovan does not share this belief in the "productivity pixie," stating that it is just a convenient excuse to make everything add up in the future.