The London market was sharply lower after oil plummeted to its lowest price in 11 years amid mounting tensions in the Middle East.
The FTSE 100 Index was 113.3 points lower at 6023.3, as Brent Crude slumped by more than 2% to 34.83 US dollars a barrel at one point today, as diplomatic relations between Saudi Arabia and Iran continue to deteriorate.
Oil prices have come under pressure from a strong dollar and a slowing Chinese economy, while major exporters such as Saudi Arabia and Russia have maintained output levels to hold on to market share.
Oil prices have fallen from 115 US dollars in June 2014 as shale oil from America has also flooded the market.
This saw investors in oil firms dump their top-flight stocks with Royal Dutch Shell down 2.5%, BP down almost 2% and Premier Oil down almost 15% in the FTSE 250.
Connor Campbell, a financial analyst at broker Spreadex, said falls in oil prices left “investors rushing for the exit”.
Oil cartel the Organisation of the Petroleum Exporting Countries (Opec) meet again in the summer, but tensions between arguably its two most powerful members Iran and Saudi Arabia make it unlikely the group will agree on a production ceiling.
The cartel failed to come up with a formal production target for the first time in recent history at its December meeting last year.
Iran is also likely to add to the world’s oil glut when western-imposed sanctions are lifted later in the year. The Islamic Republic will reportedly add an additional 500,000 barrels a day to the world’s supply within weeks of the restrictions being removed.
Concerns about over-supply and fears that the US may fill its stockpile quotas are the reasons why several investment banks such as Goldman Sachs believe oil prices might trade as low as 20 US dollars a barrel.
However, most analysts forecast oil prices will start to rise in the second half of the year as supply from non-Opec nations slows as demand remains relatively robust.