The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the IEA said on Tuesday.

The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran's return to the market offsetting any production cuts from other countries, the IEA said on Tuesday.

"Can it go any lower?" the International Energy Agency asked in its monthly oil market report. "Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower."

The oil price this week hit lows not seen in 12 years, and is currently trading at or below $29 dollars per barrel.

Iran's return to the oil market, a major reason for continued price weakness, has probably not been fully factored into prices yet, the IEA warned, contradicting many financial analysts.

Iran is facing "the not inconsiderable challenge" of finding buyers willing to take more oil into an already glutted market, the IEA said.

"However, if Iran can move quickly to offer its oil under attractive terms, there may be more 'pricing in' to come," it said.

Iran's projected 600,000 barrels per day (bpd) production boost following the end of sanctions will offset production cuts from non-OPEC producers which are also estimated at 600,000 bpd.

These production cuts are the only "bullish side" for the oil market, the IEA said, with most other factors conspiring to keep the oil price under pressure.

Growth in world demand for oil, which rose more than most years this century in 2015 before being drowned in over-supply, is expected to ease off.

Worldwide demand for oil is now expected to rise by 1.3 percent in 2016 to 95.7 million barrels of oil, a sharp slowdown after a 1.8 percent increase in 2015.

"We conclude that the oil market faces the prospect of a third successive year when supply will exceed demand by 1.0 mbd (1 million barrels per day) and there will be enormous strain on the ability of the oil system to absorb it efficiently," the IEA said.

Excess supply could even reach 1.5 million barrels per day during the first half of the year, the IEA said.

No relief should be expected from the world's top producer and dominant OPEC member Saudi Arabia which appears to be settling in for a prolonged period of low prices as it continues to protect its market share rather than engineer any price rises, the report said.