The benchmark Brent crude oil price slumped to a seven year low on close of trading on Friday after the International Energy Agency (IEA) forecast a slowdown in growth in demand for oil.
The IEA said demand in the current quarter was growing by 1.3 million barrels a day, down from 2.2 million barrels in the previous quarter. The IEA predicts that will slip back to 1.2 million barrels a day next year.
Brent crude oil fell below $39-barrel at one point, its lowest since December 2008. US crude oil also fell 50 cents to $36.12-barrel.
Oil prices are down more than 10% over the week. The trigger was a meeting of oil producers' cartel Opec late last week, which broke up in disarray as the member countries failed to agree to put a lid on production.
Opec producers pumped more oil in November than in any month since late 2008, almost 32 million barrels per day. That comes at a time when the world's economic growth is slowing, blunting demand for raw materials.
The IEA said that although consumption was likely to have peaked in the third quarter, demand growth of 1.2 million barrels a day was still healthy.
Earlier this week, the US Energy Information Administration forecast that US shale oil production, now a major source of oil supply, would fall in January for the ninth month in a row.
Sustained falls in output could help to stabilise the price of oil, although some market forecasters suggest the price could continue to fall to as low as $20 a barrel.
Commenting on the Brent Crude oil price dipping below $40-barrel, George Johnson, executive advisor in KPMG's oil and gas practice, said:
“The apparent discord among OPEC members continues to influence sentiment and oil prices.
“As the oil price hovers around $40-barrel, we’re seeing the full effects of the OPEC decision to maintain the production quota; adding further pressure to the fiscal budgets of oil producing countries, whilst inflicting further misery on the upstream industry as a whole.
“Despite a prolonged period of depressed oil prices, OPEC's track record of meeting the 30 million barrels per day quota over the last 12 months has been poor, with both Saudi Arabia and Iraq enjoying periods of record-breaking production. Going forward, cooperation among OPEC members is critical. If the Iranian situation is handled poorly, and both camps (OPEC and Iran) operate independently, we could see further price erosion.”
Commenting on the potential consequences of a prolonged lower oil price on exploration and production firms, Mark Andrews, UK Head of Oil & Gas at KPMG said:
“As the oil price begins dipping below $40-barrel, and with no sign of a recovery in the short term, it is turning into the nightmare before Christmas for the sector.
"Companies with cashflow constraints or large debt burdens are concluding that weathering the storm of low prices may not be possible for the length of time now forecast. They are now considering M&A at valuations closer to those of buyers, who have until recently kept their powder dry, and we therefore expect an increase in deal flow across the sector.”
“The continued low price has also cemented the idea that ‘lower for longer’ is here to stay in 2016 and hence, the willingness, and ability, of companies to continue to operate marginal fields is reducing. In some instances, this will result in earlier than anticipated cessation of production and the acceleration of the associated decommissioning burden.
“The impact could be a domino effect, raising the very real possibility of significant resources being left in the ground, as the cost of maintaining ageing infrastructure mounts for certain mature, late life assets that remain active.”
Alan Kennedy, UK Lead Partner for Oil Field Services at KPMG added:
“While only a short term movement, the latest price fluctuation adds to the climate of uncertainty in the service sector at a time in the year when normally oil companies and their service suppliers are typically firming up plans and budgets for the forthcoming year.
"The wider concern is that this further price wobble and uncertainty leads to more inaction and delays, which in themselves contribute to the downturn in overall activity.”
Source: Scottish Energy News