Oil was at a 12-year low of below $29 US today after the embargo on Iran was lifted over the weekend, leading to fears of a worsening glut of petroleum.

Iran reached a landmark deal last year with the U.S. and other world powers to curb its nuclear activities in exchange for the lifting of international sanctions.

The world is already producing more oil than it can use, and Iran is set to ship an additional 500,000 barrels a day, primarily to Europe.

West Texas Intermediate crude, the main North American contract, fell 48 cents to $28.94 a barrel on Monday at the close. Brent was trading even lower at $28.80 US a barrel. It is unusual for the main international contract to fall below WTI in price.

The Organization of the Petroleum Exporting Countries (OPEC) said in its monthly market report that it expects the market will start to rebalance itself this year as weak prices take their toll on production outside the cartel.

"After seven straight years of phenomenal non-OPEC supply growth, often greater than two million barrels a day, 2016 is set to see output decline as the effects of deep capex cuts start to feed through," the producer group said, predicting that production from non-OPEC sources such as the U.S. and Canada would decline.

Dollar up slightly

The Canadian dollar came off a low of 68.22 cents US reached over the weekend and closed down a tenth of cent from Friday at 68.70 cents. It fell below 69 cents last Friday amid gloom over the impact of low oil prices.

The last time the loonie was this low was the spring of 2003.

Trading was light, as U.S. markets are closed for the Martin Luther King holiday.

Markets are on edge in Canada ahead of the Bank of Canada rate policy decision Wednesday.

Many economists predict Bank of Canada governor Stephen Poloz will be forced to lower the interest rate yet again because low crude prices are cutting into Canada's economic growth.

However, some analysts say a move is unlikely as it would forced the dollar even lower and encourage borrowing at a time when consumer debt is already high.

The TSX responded to the uncertainty and to low oil prices by falling yet again. It is down 131 points at 11,942, a two-year low.

Iran determined to export 

In more bad news for oil, Iran's deputy oil minister, Roknoddin Javadi, said Monday that his country is ready to boost its output no matter what the oil price, so it can regain market share.

Iran used to export 2.3 million barrels per day, but its crude exports fell to one million in 2012 because of sanctions. Its total production currently stands at 3.1 million barrels per day.

"In the wake of removal of sanctions, Iran is prepared to increase its crude output by 500,000 barrels per day. Today, a government order was issued to increase production," Javadi said.

All seven stock markets in the Gulf states tumbled on the prospect of more Iranian oil, with Saudi stocks falling 5.4 per cent Sunday and Dubai markets down 4.6 per cent. 

Barclays analysts Alia Moubayed and Michael Cohen wrote in a research note to investors that the anticipated increase in Iranian production comes "at a very bad time" for the oil market given the existing pressure on prices.

"It is too early to say what kind of market impact Iran's return will have or how much of Iran's return is already priced in," they wrote. "Our view is that Iranian wellhead production and sales from existing onshore and offshore storage will surprise the market initially, as the country shows its muscle, leading to downward price pressure," they added.