Some of the reasons for transformer oil deterioration are
Oxidation of the oil.
The transformer breather permits the entry of air into the transformer, although it filters the moisture. The air which flows inside the transformer oxidizes the oil and forms a sludge of hydrocarbons. This process, though, usually occurs gradually over a period of many years. The sludge thus formed hinders the cooling of the transformer and causes heating. The sludge, sometimes, blocks the cooling ducts of the transformer. Higher temperatures inside the transformers, in turn, cause further sludge formation.
At high temperatures, the organic compounds in the transformer oil break down due to a phenomenon known as pyrolysis. This results in the formation of unwanted carbon compounds, sludge, etc.
Under ideal conditions, the oil in a transformer is protected against the entry of moisture by means of the silica gel filter in the breather. The silica gel changes color from blue to pink when it gets saturated with moisture. If the silica gel is not renewed in time, moisture may pass through the filter contaminating the oil.