Crude oil drops below $40 a barrel for first time since 2009

Latest plunge in prices comes as growing worries about a Chinese economic slowdown add to anxiety about excess supply

NEW YORK: The drop in US oil prices continued on Monday with the black liquid finishing below $40 a barrel, emboldening talk that lower prices could persist for longer, leading to much more carnage in the global oil patch.

Near 1800 GMT, US benchmark West Texas Intermediate for delivery in October was at $39.07 a barrel, down $1.38. The US benchmark contract last finished below $40 a barrel in February 2009.

The latest plunge in prices comes as growing worries about Chinese economic slowdown add to anxiety about excess supply.

Read: Oil prices edge up as US supplies fall, dollar reteats

"The mood is fairly depressed considering everyone is lowering the forecasts for next year and pushing out the recovery until 2017," said Fred Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America.

James West, an analyst for the oil services sector at Evercore ISI, said a lengthier downturn would endanger smaller companies that sprouted during the American shale boom. Many have been holding on in the hopes that oil prices will recover to at least $55 or $60 a barrel.

"The boom in the North American market created a lot of new companies that could participate in the shale revolution," West said. "As we take a pause, the fat is being removed."

On Friday, West had released a market comment titled "There will be blood" that predicted further activity cuts in the second half of 2015.

Read: Crude effects: Oil prices likely to rise by up to 16%

Oil prices have been mostly in retreat for the last year, dropping from a peak of more than $100 a barrel in June 2014 to the mid-$40s in March, in part due to decisions by the Organisation of the Petroleum Exporting Countries to keep output high despite lower prices.

The latest drop, since early July, roughly coincides with a wave of volatility that hit the Chinese stock market and the July 14 nuclear agreement between Iran and world powers that will lift sanctions on Iran's oil industry in exchange for stricter oversight of Iran's nuclear industry.

On top of worries about Iran and China, oil supply has been increasing at a "breakneck" pace in 2015, thanks in part to "muscular" production from Saudi Arabia and some other OPEC producers, the International Energy Agency said in an August 12 report.

Analysts have also cited seasonal factors at play, with US crude demand typically falling after the end of the key summer driving season.

"Against this backdrop, many participants in the oil industry have adopted a new mantra - 'lower for longer,'" the IEA said. "But how low and how long?"

John Kilduff, founding partner at Again Capital, expects US prices to fall into the mid-$20s. A possible turning point could be a shift in OPEC policy in December if US output falls enough.

The worries about China go "right to the heart of the matter as far as oil and other key commodities -- as far as the key demand country showing some signs of real weakness potentially," he said.

The impact on the American shale boom has been mixed so far. The US rig count, a closely watched gauge of drilling activity, has fallen by more than 1,000 from a year ago to 885 as of August 21, according to Baker Hughes.

However, US oil production has remained stubbornly high, rising for the first half of 2015 to 9.6 million barrels per day in June, the highest level since the early 1970s.

Output has since begun to ebb, falling to 9.3 million barrels a day as of August 14, according to US Department of Energy data.

Goldman Sachs has endorsed the "lower for longer" view, in part because of the United States.

"This spring's rally in prices did prove to be self-defeating," Goldman said in an August 6 note.

"Not only did all the capital markets reopen as oil prices rose, but producers began to redeploy rigs and remained under-hedged, which is a reflection that the industry simply had not faced enough pain to create real financial stress that would create change."

Turning around the oil market "will take time to achieve," Goldman concluded.

But David Pursell, managing director at Houston energy investment bank Tudor, Pickering, Holt & Co., sees oil prices recovering relatively quickly. His firm predicts oil will be back above $80 a barrel in the second half of 2016.

Pursell said the oil market is "not as oversupplied as people think" and that lower prices will stimulate more demand. He also expects US output to decline more sharply in the months ahead, and "that will get people's attention," he said.