In this paper we develop a continuum theory of clustering in ensembles of self-propelled inelastically colliding rods with applications to collective dynamics of common gliding bacteria Myxococcus xanthus. A multi-phase hydrodynamic model that couples densities of oriented and isotropic phases is described. This model is used for the analysis of an instability that leads to spontaneous formation of directionally moving dense clusters within initially dilute isotropic 'gas' of myxobacteria. Numerical simulations of this model confirm the existence of stationary dense moving clusters and also elucidate the properties of their collisions. The results are shown to be in a qualitative agreement with experiments.