As oil prices drop to more than four-year lows, analysts are slashing their forecasts, with some predicting it could plunge as much as 40 percent to around $40 a barrel.

"There is a possibility that if this price war becomes unmanageable, [we could] see prices down to about $40 a barrel [for WTI]," Jonathan Barratt, chief investment officer of Ayers Alliance Securities, told CNBC.

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But for oil to get all the way down to $40 a barrel would take "a massive lack of confidence in the economies, also a lack of pricing power," Barratt said.

Oil's continued decline

Brent (Intercontinental Exchange Europe: @LCO.1) and WTI (:.OWTI-XX) crude each fell more than 2 percent to as low as $67.90 and $64.10 a barrel respectively during Asian trade on Monday, levels last seen in 2010, as the European credit crisis was heating up.

Global oil prices have plunged since peaking in June. From around $115 a barrel, Brent crude has lost around a third of its price. Weak demand, a strong U.S. dollar and booming U.S. oil production are the three main reasons behind the fall, according to the International Energy Agency (IEA), which warned of a "new chapter" for oil markets, which could even affect the social stability of some countries.

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Saudi Arabia sparked talk of an oil price war as it has cut its official selling prices for some customers for four consecutive months through November.

Part of oil's drop has to do with supply conditions. Increased U.S. oil production has added to a glut in the world oil market. The U.S. now produces about 8.9 million barrels a day, while Saudi Arabia, the world's largest producer, pumps about 9.6 million barrels a day.

Traders to blame?

But Barratt believes much of the price drop has to do with financial traders, citing the speed of the drop over the past few trading sessions amid relatively low volumes during the holiday period.

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"We're seeing a lot of traders being forced into the market, a lot of hedges, because the prices have been so volatile toward the downside," Barratt said.

He isn't alone in predicting oil could plunge to $40 a barrel -- levels not seen in more than 10 years.

Murray Edwards, chairman of Canadian Natural Resources (Toronto Stock Exchange: CNQ-CA), one of Canada's biggest oil investors, predicted oil could fall as low as $30 a barrel before stabilizing at around $70-$75, according to a Financial Post article.

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While Forbes contributor Jesse Colombo, admittedly a perma-bear, said in an article that technical analysis suggests that if oil prices fall below $60 a barrel, $40 is the next major support.

Market balance

It doesn't look like the oil taps will be restricted any time soon, with the Organization of Petroleum Exporting Countries (OPEC) last week deciding to keep production at its current limits amid concerns about losing market share to non-OPEC producers, including the U.S.

But some don't expect oil prices will keep falling. Goldman Sachs (GS), for example, maintains its $70-$75 a barrel forecast for WTI next year.

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"The market will balance via combination of shale scaleback - slower U.S. shale growth - and subsequent OPEC supply cuts" at the organizaton's June meeting, Goldman said in a note Friday. It expects OPEC is trying to push U.S. producers to act first on cuts.

But Ayers' Barratt warns not to get too comfortable with low oil prices.

"Just as fast as it goes down, it can also go up," he said, citing the quick recovery after a sharp oil price drop in 2008.

-By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1