Oil rally will end soon

There has been an intense focus on the recent rally in crude oil prices. After all, any asset that gains over 45 percent in a few months deserves attention. But, the situation does not look much better for oil — even after the stellar rally.

Oil's rise from the ashes

WTI crude oil (April 2016)

To be sure, there have been some developments. The desperation in Venezuela has sent their oil minister on an around-the-world tour of oil producing countries, including most of OPEC and Russia. And, to his credit, he was able to secure an apparent deal to, at least, freeze production by the countries surveyed, at January's high levels.

The deal was seen as a start to a broader accord among warring factions within the producing community, most notably Iran and Saudi Arabia. We could nit-pick and call out the fact the agreement seems tenuous, at best, with several of the key players requiring 100 percent participation and compliance by all producers, but we won't — even though the Kuwait oil minister repeated this caveat just this week — because there is something larger occurring.

Equities, copper, iron ore, and most assets have enjoyed significant rallies over the past several weeks.

The most curious of all the price moves has been the decline of the dollar versus the yen and euro, among other currencies, which comes as the Federal Reserve appears ready to hike interest rates at least one more time this year while the European Central Bank and the Bank of Japan are embarking on even greater monetary easing measures. It is hard to square.

In commodities, prices can defy the basic fundamentals of their market for some time, and oil prices are doing just that right now.

In the case of oil, global demand remains a big question mark. Global manufacturing data have been weak, based on PMI readings last week from the major economies, including the U.S.

China trade data this week were a disaster, with exports plunging 25 percent, the impact of the Lunar New Year Holiday notwithstanding. It speaks to real weakness among China's trading partners, especially Germany.

On the supply side, Iraq has experienced some outages on its northern and southern pipelines. In the north, it was due to sabotage, which is part of broader geopolitical jitters in the region, which, until now, have been largely ignored.

Other than that, however, global production levels have remained at or near record levels, with Russian companies producing at a new post-Soviet era high in February.

The full return of Iran to the market was hampered by some U.S. banking sanctions that remain, even after the nuclear accord, but those hurdles are being overcome.

While oil prices are participating in the broad-based asset rally, all of the elements that brought the energy market and industry to its knees remain in place, and the curious case of the falling dollar is not likely to last either, in the face of hyper-easing policies that are coming from abroad.

Investors rushed to call a bottom in oil prices last March, August, January, and just last month.

The fall has been spectacular, but the market is not out of the woods. Not by a long shot.

Oil prices and oil company stocks are set to fall again. The deal between OPEC and Russia is unlikely to hold together, if history is a guide, and it is why the Saudis have ruled out a production cut, due to their complete mistrust of their producing country "partners."

Also, the Saudis like what they see, in terms of the damage being done to the U.S. shale industry. Their plan is working.

If you caught the most recent iteration of the market bottom for oil prices, it is time to harvest those gains.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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