Marshall Gittler, Head of Investment research, FXPRIMUS.com

The price of oil rebounded from its lows earlier this year on hopes that OPEC and non-OPEC countries (principally Russia) can get together and agree to rein in production. Those hopes were dashed on Sunday when the meeting failed to reach any agreement and broke up acrimoniously. The result? A 5.3% rally in the price of oil.

In my long career watching markets, I have rarely seen such an inexplicable and illogical market movement.

Now, I admit I’m an FX strategist and not an oil market specialist. But we FX strategists have to get our hands dirty in the oil market (preferably in sweet, light crudes) occasionally, because the correlation between oil and many currencies – indeed, all financial markets – has been so strong recently. And I just don’t see this rally in oil lasting.

As a result, I don’t see the rally in CAD lasting much longer, either. All the commodity currencies are at risk if and when the oil price falls back towards its earlier lows.

There are a few reasons why I expect the price to fall. First, I don’t believe that OPEC can come to an agreement among itself to limit production, much less with Russia or any other producer outside the group. Iran and Saudi Arabia are basically at war; even if their economic interests may coincide, there’s too much bad blood between these two for the time being for them to cooperate.

Other OPEC members are also struggling to pay their bills and have an overwhelming incentive to cheat on any agreement.

Furthermore, as long as Iran and Libya are out of the agreement, then the two members that have the most room to ramp up their production are free to do so, making any agreement among the others moot.

Finally, several countries pushed their production up as much as possible in the run-up to the meeting so that if they did freeze output at January levels, that was as much as they could produce anyway.

In fact, the OPEC/non-OPEC talks sounded to me like a training method that one of my college professors found for his dog: tell him to do what he was doing already. “Jump up on that sofa!” “Chew those shoes!” By freezing output at the greatest possible level for many countries, OPEC would have done nothing more than to give them license to pump all they could while branding it a restriction. That isn’t market management, it’s PR. And they couldn’t even agree on that!

So I think the talk in the market that there will be another meeting in May to come to some agreement is wishful thinking. I don’t expect any concrete developments until the June OPEC meeting, and even then I don’t expect any substantial change in policy.

Fundamentally, Saudi Arabia has given notice that it will no longer play the role of “swing producer” in OPEC and therefore OPEC will no longer play the role of “swing producer” in the global oil market. This is a major change in the way the oil market behaves.

Who is the swing producer then? Apparently, it’s the US shale oil producer.

And that’s another reason why I think this rally won’t last. In that respect, OPEC’s success in driving prices up in April has sowed the seeds of its own destruction. The US oil companies have to roll over their bank loans twice a year, once in April and once in September. By raising prices in April, OPEC has made it more likely that these companies will get the financing that they need to stay in business and keep pumping oil.

So on both sides – OPEC and non-OPEC – I just don’t see the kind of reduction in supply any time soon that’s going to make a meaningful dent in the current oversupply. Until that happens, I expect the oil market to remain oversupplied, oil prices to fall back, and CAD and the other oil-related currencies to suffer.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.